"insider secrets to buying a business"
1. Introduction2. Buyer Motivations and Market Outlook3. Seller Motivations To Sell4. Learn How To Value A Business5. Creative Ideas To Evaluate Your Seller's Financial Statements6. Advertising For Qualified Sellers7. Telemarketing For Qualified Sellers8. Handle Seller's Replies9. Learn To Qualify Your Sellers Quickly10. Buy A Business From A Qualified Seller11. Learn How To Close The Sale12. Handling Seller's Remorse13. Lawyers and Accountants 1. Introduction
Today, the need for business ownership is stronger than ever. Because family responsibilities play such an important part in the lives of men and women, millions of individuals and couples are seeking ways to purchase a business. Tens of thousands of people all across America want to know how they can purchase a business and earn enough money to run a household. That is the reason this handbook is of special need. In the past decade, business opportunities that match a person's skills, interests, abilities, and ingenuity have become almost limitless. The purpose of this handbook is to show you that it's simple and easy to join the ranks of success-minded people by choosing a business that suits your interests. Business histories have shown over and over again that the rewards and advantages of buying a business can go far beyond a person's wildest dreams! This handbook offers you many buying ideas that have been tested and are proven to work. Business buyers have successfully used these ideas and techniques. There are so many great ideas in this handbook that they can’t be organized into entirely distinct sections. You will find several tips and techniques throughout each section that will relate to a variety of topics; this indicates the connections between the suggestions in each section of the handbook. 2. Buyer Motivations and Market Outlook The list of market drivers that favor business activity includes the following: • Favorable economic conditions. The United States is enjoying its longest period of expansion. Inflation is relatively low, GDP growth is high, and productivity continues to increase (driven by technological innovations and its effect upon the supply chain).• Favorable capital markets. Money for making deals is readily available. Strong equity valuations and appreciation make stock a viable acquisition currency that conserves cash and the debt capacity of acquiring firms. Debt rates have been reasonably stable and continue to be affordable.• Technological impact on risk and capital costs. Technological development has increased the availability of rich, real-time information about customers, corporate performance, and markets, allowing management to more effectively deploy resources and manage uncertainty. The reduction of uncertainty and mitigation of risk combine to effectively reduce the risk premiums associated with business activity.• Growth needed to maintain stock valuations. In the “old economy” stock price increases were fueled by revenue and earnings increases. However, in the “new economy” stock prices seem to move with announcements of partnerships, alliances and acquisitions. This encourages deal activity – especially in situations where organic growth appears inadequate.• Need for skilled and talented people. In a growing economy that is moving at “internet speed,” human capital is a valuable asset that is critical for success. The right acquisition provides immediate access to needed human resources.• Customer is becoming king. In the “new economy”, the customer is becoming increasingly more powerful. Identifying and meeting the needs of customers is critical to revenue growth and staving off competition. Acquisitions provide a viable way for companies to stay responsive to the needs and increasing expectations of their customers.• Synergies between the Old and the New. Acquisitions of technology companies are an attractive strategy for traditional “bricks and mortar” companies seeking immediate access to technology. In addition, the equity markets may reward “old economy” companies that appear to be successfully transitioning into “new economy” companies. On the other hand, cash-rich technology companies seeking revenues, earnings and tangible asset values, may find a merger or acquisition of an “old economy” company an attractive alternative – especially if equity markets and funding sources return to investment fundamentals.• Strategic alliances proliferate in the new economy. The so-called “new economy” encourages strategic alliances and partnerships. In addition to stimulating “buzz” within the equity markets, these alliances provide the players with much needed resources: capital, technology, content and market access, and numbers• Today’s private equity firms will be tomorrow’s sellers. Private equity groups have been active acquirers and investors. The holding period for these investors is three to five years. That being the case, as their holdings season and increase in value, the private equity groups may be looking to the M&A market to cash in on their holdings over the next few years.• Buyers Of Businesses Need To Make A Living Wage: It's a known fact that many business sales are structured so that the acquirers of businesses will be able to make a living wage and support the debt service. Many business sales must be structured to accommodate these requirements.
4. Seller Motivations To Sell
A recent survey conducted by a national consulting company provides insight into a seller’s motivation to sell their company. Owners of 300 privately held businesses that were sold or transferred were surveyed. It was found that maximizing financial return as their top succession objective. Next, was minimizing their tax liability followed by protecting the viability of the company, and then finally protecting employee jobs. The survey indicated that the “most widely cited ‘value driver’ for selling the business was the expected synergies from a sale or merger.” Accordingly, 45% of the owners had a continuing role within the company for an average of 4.4 years after the transaction. 5. Learn How To Value A Business
How do you calculate the worth of a small business? Forget about discounted cash flow or a multiple of earnings or assets. Forget all the yardsticks common to valuing larger corporations. Use an easier formula. A business is simply worth the total of inventory (valued at seller’s cost), equipment and fixtures (at fair market value), leasehold improvements (at fair market value), and one year’s net income. Additionally, non-cash flow items (depreciation and amortization) should be added back to net income because they represent an accrued expense for income tax purposes and does not affect cash flow. For example, interest expense should be added back to net income to compute an adjusted cash flow. It's assumed that the buyer of the business will not assume current debt. In most cases the Buyer is purchasing the business free of encumbrances resulting in a new interest expense. Officer's salary should also be added back to net income to determine cash flow. (This refers to the corporation, as the proprietorship does not expense Owner’s Draw). Officer's life insurance and automobile expenses should also be added back to properly reflect cash flow of the businessFringe Benefits should also be added back to net income to determine true cash flow. 1. Is the owner writing off expenses that are not essential to the day-to-day operation of the business?2. Are there personal expenses that are not necessary?3. Does the owner purchase equipment for home use and expense it through the business?4. Does the owner contribute to an officer’s pension or insurance fund?• The above items are needed in determining true cash flow of the business. In most cases the Seller will respond favorably to these questions. Keep in mind this formula is used for Asset Sales. Please contact a support representative at 614-790-1140 to discuss Stock Sales.Sometimes it is not uncommon to add additional value to businesses that are established five plus years. Up to 15% could be added to the selling price of the business. You can use almost any other business valuation method, but you’ll find you get roughly the same outcome. In fact, numerous on-the-spot business appraisals have been done for the courts when there has been partnership dissolution, an argument, and a death in the family where business ownership is a portion of the deceased’s estate. There are many other reasons for such appraisals when a determination of business worth is required. This formula is being used with increasing frequency because it works. Understand The Importance Of Down Payment When You Purchase A Business.... Typically a Buyer is willing to put a down payment in an amount equal to one year’s net before tax or debt service. If the down payment is less than one year’s net income (composed of Seller’s draw, depreciation, amortization, fringe benefits, company net, etc.), minus the applicable debt service payment, you will have a business that would be considered attractive to purchase.Down payment is an important concept to understand. Many owners of businesses seem to think they will get an all cash offer at closing. The majority of times this is an unrealistic request. The Buyer, by leveraging their initial investment, will usually be able to buy a larger company and immediately see an increase in yearly personal cash flow. For example, I've met a Seller who owns a light manufacturing company. They insisted that they would only sell their business if they would be able to obtain an all cash transaction at close of sale. The business is valued at $300,000. Therefore, based upon the Sellers request. The Buyer of the business will need to come up with $300,000 at close of sale. Rule of Thumb: The Buyer should be able to put down $100,000 at close of sale and finance the balance over five years at 10% (terms could be negotiated to be mutually favorable for both Buyer and Seller). If the Buyer would be required to put down $300,000 at close of sale, then the Buyer would be in a position to purchase a $900,000 business by investing the same $300,000 at close of sale. Also, the Buyer needs to understand the tax implications the Seller will incur by receiving a 100% cash offer. Once, the Seller understands their personal tax implications they probably will have a strong interest in building a stronger relationship with the Buyer and be in a positive frame of mind to accept owner's financing at close of sale. 6. Creative Ideas To Analyze Your Seller's Financial Statements
The procurement and reliability of the Seller's financial statements is the single most important factor that affects the ultimate sale of their business. From time to time, Buyers have a sense that Sellers will attempt to inflate the profitability of their businesses, and only in rare cases will the Buyer not want to examine the Seller’s books and records. This section will provide an introduction to the analysis of financial statements. The financial statement is defined as a report that accurately discloses the financial results of the business at the end of a fiscal period, usually a year. This statement includes the income statement, balance sheet, statement of retained earnings, and a statement of changes in financial position. It is recommended that the financial statement includes these statements, but it is sometimes impossible to obtain all the required reports, especially the statement of changes in financial position. Therefore, it is recommended that the income statement and balance sheet be acceptable for analysis purposes. 1. Income Statement. The amount of net income earned during a fiscal period, usually a year.2. Balance Sheet. This statement of assets, liabilities, and capital discloses the financial condition of the firm on a specific date.3. Statement of Retained Earnings. This statement contains the accounting period covered and shows the beginning balance in retained earnings, income earned for the period, dividends distributed, and the ending balance. This statement gives the reader full disclosure about the affect of earnings, losses, and dividends on the stockholder’s equity. 4. Statement of Changes in Financial Position. This statement is required by the Accounting Principles Board and is to be prepared in addition to the other statements to fully disclose the financing and investing activities as well as the changes in financial position if users are to make informed decisions about the business. This statement must show the inflow (source) of all financial resources, the outflow (application) of funds, and the net increase (or decrease) in the funds during the fiscal period. 5. Income Statement. The main purpose for analyzing this statement is to determine revenues earned, the costs incurred in earning these revenues, the operating expenses, and the resulting net income earned for the period. The main objective is to determine the earnings stream or cash flow of the business. Keep in mind that we are not concerned with overall performance standards, but the extent of the earnings stream prior to debt service and tax write-offs. This is being done to establish the Buyer’s cash flow. • Revenues. These are analyzed and recorded from the sales (top position) of the statement. A distinction must be made to determine the accounting method being used (cash or accrual).• Cost of Goods Sold. This section determines the cost of goods manufactured or sold, and relates to beginning and ending inventories. It should be mentioned that inventory methods can either overstate or understate the cost of goods sold disclosed on the statement, and therefore, inventory costing methods should be disclosed and final ending inventory based on physical counts and methods agreed upon.• Gross Profit. This is determined by subtracting cost of goods sold from revenues and should be compared to industry averages.• Operating Expenses. These expenses include fixed overhead and total operating expense of the business.o Officer’s salaries should be added to net income to determine cash flow. (This refers to the corporation, as the proprietorship does not expense Owner’s Draw).o Depreciation and Amortization should be added to net income because it represents an accrued expense for income tax purposes and does not affect cash flow.o Interest expense should be added to net income if current debt will not be assumed. In most cases the Buyer is purchasing the business free of encumbrances resulting in a new interest expense.o Automobile expense is added to net income.o Officer’s life insurance is added to net income.o Fringe benefits are added to net income. Is the owner writing off expenses that are not essential to the daily operation of the business? Are there personal expenses that are not necessary? Does the owner purchase equipment for home use and expense it through the business? Does the owner contribute to an officer’s pension or insurance fund?• The above items are needed in determining true cash flow of the business. In most cases the Seller will respond favorably to these questions.6. Balance Sheet The balance sheet is an integral part of the financial statement, which shows the financial condition of the business as of a specific date. This report indicates the assets, liabilities, and owner’s capital, usually at year-end. Specifically, it indicates how the profits shown on the income statement have been invested into the business. The following equation can be used to illustrate the nature and use of the balance sheet:ASSETS = LIABILITIES + OWNERS’ EQUITY Assets are the economic resources owned by a business that are expected to assist in the earning of revenues in the future. Liabilities are financial obligations to outside creditors. Owners’ equity is the claim the owners have on the assets of the business. The assets of a business are generally subdivided into the following categories:o Current Assetso Investmentso Property, Plant, and Equipmento Intangible Assetso Other Assets The balance sheet can be analyzed to determine a firm’s liquidity (short-term debt paying ability), profitability, leverage (the extent the firm is financed by outside creditors), and equity. It is recommended that the tests for liquidity and profitability be performed prior to recommendations or advice on valuation. Current assets can be compared to current liabilities to determine the short-term debt paying ability of the business. If this ratio is less than 2 to 1 then it is recommended that the composition of current assets and current liabilities be analyzed further because the firm is in a very non-liquid position. In addition, the inventories should be subtracted from current assets and compared to current liabilities for another test for liquidity. (A favorable rating would be 1:1.) Liabilities are shown as current liabilities and long-term liabilities. The owners’ equity section of the balance sheet differs depending on whether the business is organized as a proprietorship, partnership, or a corporation. Liabilities are separated into current (due within 12 months) and long-term (due longer than 12 months). 1. Accounts payable includes current obligations of the firm for operation expenses and the purchase of merchandise.2. Sales taxes & payroll taxes payable are current tax obligations that must be paid during the current year. The business is responsible for these obligations even during a change in ownership. 3. Notes or contract payable are debts (secured or non-secured) owed to banks, financing institutions, or individuals. The amount on the balance sheet is the principal balance as of the balance sheet date. Owners’ Equity or Net Worth is defined as the assets less total liabilities. This section will be called “Stockholder’s Equity” in a corporation and “Capital” or “Owners’ Equity” in a proprietorship or partnership. In the corporation, the stock issued and outstanding will be shown in addition to current earnings and retained earnings. SUMMARY: The recommended analysis has included some basic methods for determining the financial health of the business and to assist in the sale process. In addition, it also provides valuable information required in the negotiations between Buyer and Seller. It is recommended that financial statements be obtained or compiled from the Seller’s records to establish the “true” earning stream of the business. 7. Advertising For Qualified Sellers
Advertisements should be brief and bring out the best and most saleable points of your business ownership or management experiences as well as give some indication of financial strength. It is advised that you keep your name confidential; however, it is appropriate to indicate the category of business you are seeking. Ads should show a range of purchase prices you could realistically afford (this will minimize frustrations when you begin negotiations). Remember your ad should be catchy and draw the attention of the reader. You want to include just enough information to draw the readers’ attention and curiosity. Sample Advertisement:Motivated Buyer - Local Buyer interested in purchasing an established business. Experienced in managing and handling cash flow. Looking at businesses that range from $100,000 - $300,000 in sales price. Terms negotiable. Serious inquiries please reply to............... Where to place Advertisements: Local Newspapers. The major local newspaper is historically the very best choice. Typically, most newspapers have a “Business Opportunities” classification. I strongly recommend the Sunday edition, which has, without question, the best qualified Sellers. The Monday and Wednesday editions are a good secondary choice to follow-up replies. National Publications. Advertising in these publications (i.e. The Wall Street Journal) is expensive but sometimes worthwhile. Such advertisements are beneficial when dealing with a business whose sales price is a substantial six or seven-figure sum or more. Trade Magazines/Other Local Publications. Use these only as secondary sources. Historically, advertising in these magazines has resulted in minimal response. 8. Telemarketing For Qualified Sellers
Telemarketing is my favorite selling technique. It takes some time to get comfortable with calling Business Owners directly during the day. If you have sales experience and feel comfortable with telemarketing, using this technique is highly encouraged. Your primary objective is to uncover qualified Sellers who will eventually be motivated to sell their company. Keep in mind, it takes time to develop a relationship with a Seller. The more comfortable the Seller feels with the Buyer, the easier it becomes for the Seller to provide information such as financial statements, customer lists, and the business processes of the company.Contact Management Software. It's very important that you use a contact management program to track your daily activity. I recommend either ACT for Windows or Microsoft Outlook. These programs allow you to customize the screens and maintain information on Seller personal profiles as well as business issues. You can refer to this information at anytime and have a comfortable conversation with the Seller about their business while maintaining a strong degree of confidentiality. These systems also come with automated tickler systems that alert you when you should initiate follow-up communication with a phone call or letter. Again, your primary objective is to develop and strengthen a relationship with a qualified Seller that one day will become a motivated Seller. The Seller has an interest to maintain a relationship with the Buyer because when they truly decide to sell their business, they need to begin to find motivated buyers like you and keep their strategies confidential. Target Your AudienceYou could narrow down your prospective audience of business owners by using a Contact Management Software Database Program. You can purchase one of several CD-ROM Telephone Directories at local computer stores (these programs cost up to $200). I use "Powerfinder - PhoneDisc" and it is very accurate. These programs are user friendly and easy to work, but they usually do not come with the owner's name. However, when you contact the business the majority of the companies will give you the business owner's name and/or president of the company. Additionally, the programs allow you to download the company names and addresses to the most popular contact management software programs. Other effective databases could be obtained from your Chamber of Commerce as well as newspapers and magazines that compile business owners' names, company names, SIC codes, addresses and phone numbers. Once you have selected your target audience and have uploaded the names to your Contact Management Database Program, you can send an introduction letter as follows: Introduction LetterAn introduction letter to a business owner is very effective in locating a qualified Seller. The letter should state that you have an interest in purchasing a company similar to the products and services they offer. Mention your strengths and highlight that you have an interest in purchasing a business within the next 180 days. If your target audience is small, try to personalize the letter by hand writing on personal stationary while maintaining a professional writing style. In the letter, it is very important to include a specific date and time you will contact the business owner. Also share that you're interested in the purchase of a business within a certain price range. This will allow you to qualify the Sellers initially and not keep the seller's expectations high. Surprisingly, when you contact the business owner at the date and time you suggested, the majority of times the owner will take the call. When you have the owner on the phone, re-introduce yourself and give a quick synopsis of your personal acquisition goals and time frame. Then ask the Seller some questions about themselves. It's best to have them continue a dialogue. You should try to spend no more than ten minutes on the phone with the Seller. Next, schedule either a lunch or introduction meeting. If possible, meet at their business. If the Seller is uncomfortable with this thought suggest meeting off premises at either a restaurant or coffee shop. People tend to become more relaxed when they are eating and/or drinking. For sample letters and/or telemarketing scripts please e-mail our office at your convenience. 9. Handle Seller's Replies
When you're meeting the Seller for the first time it's very important to listen. Develop a relation with them and try to determine the reason for sale. Many times the Seller will highlight their motivations for selling their business. Sellers who are financially strapped will be pro-active about timeframes (i.e.. closing dates, etc.). They will seem hurried and impatient. When you meet Sellers similar to this attempt to have them relax and discuss their personal situation. You should be able to determine if the Seller is losing their company (bankruptcy, customer base, etc.). Unless you are looking for a turn-around, you may want to pass on that Seller. However, you can still log them in your contact management program. Also, if you continue to have an interest in the company subsequent to this initial meeting, try to see the business as soon as possible to qualify the business to your personal likings. Keep in mind there is no perfect business 10. Learn To Qualify Your Sellers Quickly One of the most serious mistakes you can make is trying to buy a business and not qualifying a Seller. When you completely qualify a Seller, you may then determine if they are really a Seller, what type of Buyer they would like to develop a relationship with, follow-up with the Seller properly, and control the sale. 1. Determine the seller’s precise liquid cash requirements. Don’t be mislead by a claim of, "I must have $1 million dollars in cash at closing." All business sales must be a win-win situation. The Buyer must be able to make a living wage and support the debt service in most of the cases and the Seller must be able to be 100% comfortable with the price and terms. The stronger the relationship, the better. The Seller will be more comfortable to structure a transaction with someone they trust and have confidence in. 2. Explain to the Seller your financial requirements. If handled properly, the Seller will understand that you will not be able to work in the business for five years and not make a living wage if the price is to high or the terms are unrealistic. Once the Seller has confidence in your abilities they will structure a mutually favorable transaction. 3. Keep in mind that even though the Buyer is extremely qualified to purchase the business, the Seller may not feel comfortable with the Buyer personally. This is very important when trying to negotiate a mutually favorable transaction. I would recommend finding another company. Otherwise, both parties will become frustrated and no transaction will ever take place. 4. Fully explain the concept of Seller’s remorse. The following is the information you MUST obtain from your prospective Seller.• How long have you been considering to Sell your company?• Is your spouse comfortable with your decision to Sell?• Personal debts required paying off at closing, if possible.• Current tax returns and financial statements.• How long will the Seller train you in the business?• Why does Seller want to sell their business?• Income required subsequent to the sale. Miscellaneous – A Few Additional Items to Expect and Control: The Wife – She must be involved from the outset. Without her blessing, there will be no sale. Anticipate and control this. When you are with the man and his wife, focus your attention and conversation on her. Recognize that the wife is the one who will generally make the ultimate decision. Do not pressure your prospective Seller. Suggestions are more effective. Listen, Listen, Listen. The problem with most people is they like to talk to the extent that they do not listen to what the Seller says. A sale should fulfill a “need” or “desire”. What is the Seller’s “need/or “desire” 11. Buy A Business From A Qualified Seller Remember, a Seller always buys the salesman first, and the product second. Establish complete honesty as your priority. Never make the mistake of bending the truth. You may win initial points with the Seller by raising their hopes, but in the end, when all the facts are known (and this will always be the case), you will have destroyed your rapport with the Seller and decreased the possibility of closing your sale. Follow these steps after you have qualified your Seller,and, after your prospective Seller has an interest in you. Arrange for a physical tour of their business premises (They probably will have you sign a Confidentiality agreement prior to releasing additional company details and/or company tour - this is common). I strongly encourage your prospective Seller to have his wife attend as well. Remember, 99% of the time it is the wife who will make the ultimate decision. Control the initial portion of the meeting. Encourage a dialogue between yourself and the Seller. It’s important that you get comfortable with the Seller. When the meeting comes to a closure it’s important for you to ask the Seller what they really think. Listen and take notes. If the Seller displays a negative reaction:Find out why. If their feelings are strong, don’t try to talk your Seller back into it. Find another company to purchase. If your Seller keeps coming back to you or continues a dialogue, you will know your Seller is truly interested and wants you to play the role of talking them back into it. Don’t succumb to this. Make your Seller talk you back into discussing the purchase of their business. If you’re Seller has a favorable attitude towards selling their business to you,Find out why and close. Sometimes it helps with the psychology of the sale when the Buyer suggests that they should keep their business and not continue the sale process. Get your Seller to fight to continue the conversation on selling their company. Find out exactly what needs to be done to complete the sale. Then establish an orderly program to overcome the Seller ’s objections. Learn to “Line up all the ducks in a row and then knock them down.” Psychology of the Sale - Be on The Alert if Reversing Happens Reversing Psychology of the Sale Reversing is defined as a method of accomplishing a desired result, wherein the user “takes away” the sought after result he wishes to achieve. The motive: to make the person fight to “get it back”. Reversing can be an extremely powerful tool for you to use under appropriate circumstances, if used properly. Example situation: Your Seller, Bill Jones, has executed your purchase contract and receipt Thursday morning. By Thursday afternoon, you have placed the sale into escrow. At 8:00 pm that night, the Seller calls you at home and explodes with Seller ’s remorse. He tells you he is uncomfortable and panicky about the sale. What do you do? The worst approach: While on the phone you say, “Well, Bill, tell me precisely what is bothering you. I’m sure we can work it out.” This approach will probably do you no good whatsoever. First, you will never accomplish anything on the phone. Only one-on-one contact will work. Second, listening to his/her complaints and trying to correct them will probably not work. The reason – emotions are now heavily in play. Common sense explanations will serve only to worry the Seller more. He will become extremely defensive and withdrawn. A much better approach: “Bill, you are obviously upset. I doubt that we’ll be able to accomplish much on the phone now. I’ll be in my office at 9:00 am sharp in the morning. Why not meet me and we’ll discuss this at length.” (Take pressure off.). When you arrive at Bill's office, tell him, “Bill, I’ve been thinking this over. You are obviously uncomfortable about the sale and I certainly wouldn’t want you to proceed. So let’s just forget about it. You may want to take your business off the market.Your immediate goals: Take the pressure off! Your more immediate goals: to make the Seller fight to re-open the conversation on the contracted sale. He may say “But I signed a contract. How can we just forget about the sale?” Your reaction, “Don’t worry”. REMEMBER: The longer you “take it away”, the better your result should be in “reversing” the Seller back into the sale. Your best chance at accomplishing this is by removing the pressure. The tactic of, “You’ve signed a contract, you’re stuck, it’s too late," will only make the Seller defensive and drive him to an attorney. Reversing really takes courage but it works much more often than not. Continue the process. Anticipate what might be causing the Seller's concern. Deal immediately with those concerns, even if they are only potential concerns. If you do not, they will grow into concerns that will block an ultimate sale. Continue to anticipate. For example, if the Seller has not sold a business before, he may be unfamiliar with the paperwork to come. Give him a copy of a contract. Let him take it home so that when the time comes for him to sign the purchase contract, he will not be afraid of its appearance or content. Control the initial portion of the meeting. Encourage a dialogue between yourself and the Seller. It’s important that you get comfortable with the Seller. When the meeting comes to a closure it’s important for you to ask the Seller what he really thinks. Listen and take notes. If the Seller displays a negative reaction:Find out why. If their feelings are still strong, don’t try to talk your Seller back into it. If your Seller keeps coming back to your business or continues a dialogue, you will know your Seller is truly is interested and wants you to play the role of talking them back into it. Don’t succumb to this. Make your Buyer talk you back into discussing it. If you’re Seller has a favorable attitude towards buying your business: Find out why and close. Suggest other opportunities. Get your Seller to fight to continue the conversation. Find out exactly what needs to be done to complete the sale. Ask yourself, “’What is stopping the Seller?" Then establish an orderly program to overcome the Seller ’s objections. Learn to “Line up all the ducks in a row and then knock them down. 12. Learn How To Close The Sale If the Seller contacts you and is very interested in accepting your recent offer either by a letter of intent and/or a formal purchase contract. Please follow the following steps: • Calm down and take a deep breath.• Make certain there are no contingencies in the sale. The Seller can cause a lot of emotional pain by requiring you to go through hoops and no sale will come out of it. If contingencies cannot be avoided please strongly advise that these contingencies must be taken off within ten days.• Pin down an anticipated closing date.• Obtain the Seller ’s current financial statement. Make sure the financial stability is still there. Maybe something happened recently to cause a decline in company sales. Selling the business could be the quickest out for the Seller.• If the Seller requires more than you can financially handle, be kind to the Seller and explain the importance of your original purchase price. Unless the Seller decreases his offer it’s important to tell the Seller you need some time to think about his offer. Always Be In A Position To Walk Away From A Company. • Remember that if you and/or the Seller need to make changes to the purchase contract it is important to obtain initials and dates on the contract Control again is the key. It has been said that the easier part of business sales is getting the Seller to make an offer, and having the Buyer accept it. There is much truth in this. However, you must learn not only to resolve problems, but also to anticipate them by interpreting the series of events that have brought you to this point in the sale. Only then will you be able to maintain control, and your ability to purchase a business. Neither high pressure nor low-pressure sales techniques, nor a combination of them, nor your brand of selling will carry much impact without anticipation and control.What to look for? Seller ’s Remorse: Seller ’s remorse in varying degrees will be inherent in every sale. A Seller will always question the decision he has made or is about to make. Count on it, anticipate it, and control it. Seller ’s remorse will peak immediately after or shortly after he/she signs the contract. He may become aware of all of the things that can go wrong, he may feel uneasy and unsure of his decision, he may remember all of the little things he forgot to check into that he now feels will create grave consequences to him. It is up to you to anticipate and control Seller ’s remorse: • Earnest Money: We strongly recommend not presenting a check for earnest money until the moment you are ready to write a purchase contract. We know the writing of this check may serve as a possible catalyst to a potential severe Seller's remorse syndrome. Because this is anticipated, we can control it by not presenting this check until the proper time. Strengthen your relationship with the Seller until the Purchase Contract and Earnest Money Check will be required.• Contracts with Contingencies: Again, since we anticipate and are aware that Seller ’s remorse may appear, we can control it. Do not write contracts with contingencies or conditions. Before the ink is dry, Seller ’s remorse will begin and your contract may well turn out to be worthless. When a purchase contract is executed, it must be a totally binding document.1. Company Financial Information - Sellers will often insist on receiving an offer prior to the Buyer's review or their accountant’s examination of the business books and records. Insist that the books and records be checked prior to the contract.2. Lease Assignments - Before writing the contract, talk to the landlord. Obtain at least a verbal ok from the landlord that he will approve the assignment. But again, anticipate and control. Do not write a contract subject to approval of lease assignment.3. Financing - If the Seller is to have you assume a bank credit line, make sure you meet their bank representative before writing the contract. If you are to assume any equipment leases, again obtain all lease approvals prior to writing the contact.4. Attorney Review – The Seller will almost always request the opinion of their attorney for advise and draft the purchase contract. Tell the Seller that you were not only going to recommend that they consult an attorney, but that you were going to demand it anyway. You will win big immediate points with the Seller. But again, anticipate and control. Most likely this will be a contingent item in the contract. Try to keep the date of attorney’s review less than one week from mutually agreeing to the terms of the contract.Also, as discussed before, if you review a sample purchase contract early in your sales cycle with the Seller the purchase contract will be less intimidating.5. Miscellaneous - Eliminate all contingencies, actual or potential, before writing a contract.Back to Top 13. Handling Seller's Remorse Be proactive in controlling Seller remorse. Create a psychological advantage. Make the Seller feel that you are trying to help him, not pressure him. Tell the Seller that you insist that “all cards be on the table” before you will even discuss a contract or check. You will win big points with the Seller and strengthen your rapport with him by dealing in this way. But more importantly, you will have held off possible Seller ’s remorse until the proper time. You will have anticipated and controlled it.Read Reversing For Tips on Handling Seller's Remorse. 14. Lawyers And Accountants Many attorneys and accountants that I have worked with attempt to be professional in structuring a transaction. Usually they will attempt to find a win-win scenario. If possible, try to develop a friendly relationship with your Seller ’s professional council. However, most attorneys and accountants representing the Seller will maintain a distance so that they can control negotiations relating to their client’s transaction. Many times the Buyer would be better off hiring a professional advisor to assist in handling the negotiations with the Seller and/or Seller ’s legal council. Also, if the Seller begins to distance themselves during the negotiation stages it may be helpful to have your professional advisor handle the negotiations.
Today, the need for business ownership is stronger than ever. Because family responsibilities play such an important part in the lives of men and women, millions of individuals and couples are seeking ways to purchase a business. Tens of thousands of people all across America want to know how they can purchase a business and earn enough money to run a household. That is the reason this handbook is of special need. In the past decade, business opportunities that match a person's skills, interests, abilities, and ingenuity have become almost limitless. The purpose of this handbook is to show you that it's simple and easy to join the ranks of success-minded people by choosing a business that suits your interests. Business histories have shown over and over again that the rewards and advantages of buying a business can go far beyond a person's wildest dreams! This handbook offers you many buying ideas that have been tested and are proven to work. Business buyers have successfully used these ideas and techniques. There are so many great ideas in this handbook that they can’t be organized into entirely distinct sections. You will find several tips and techniques throughout each section that will relate to a variety of topics; this indicates the connections between the suggestions in each section of the handbook. 2. Buyer Motivations and Market Outlook The list of market drivers that favor business activity includes the following: • Favorable economic conditions. The United States is enjoying its longest period of expansion. Inflation is relatively low, GDP growth is high, and productivity continues to increase (driven by technological innovations and its effect upon the supply chain).• Favorable capital markets. Money for making deals is readily available. Strong equity valuations and appreciation make stock a viable acquisition currency that conserves cash and the debt capacity of acquiring firms. Debt rates have been reasonably stable and continue to be affordable.• Technological impact on risk and capital costs. Technological development has increased the availability of rich, real-time information about customers, corporate performance, and markets, allowing management to more effectively deploy resources and manage uncertainty. The reduction of uncertainty and mitigation of risk combine to effectively reduce the risk premiums associated with business activity.• Growth needed to maintain stock valuations. In the “old economy” stock price increases were fueled by revenue and earnings increases. However, in the “new economy” stock prices seem to move with announcements of partnerships, alliances and acquisitions. This encourages deal activity – especially in situations where organic growth appears inadequate.• Need for skilled and talented people. In a growing economy that is moving at “internet speed,” human capital is a valuable asset that is critical for success. The right acquisition provides immediate access to needed human resources.• Customer is becoming king. In the “new economy”, the customer is becoming increasingly more powerful. Identifying and meeting the needs of customers is critical to revenue growth and staving off competition. Acquisitions provide a viable way for companies to stay responsive to the needs and increasing expectations of their customers.• Synergies between the Old and the New. Acquisitions of technology companies are an attractive strategy for traditional “bricks and mortar” companies seeking immediate access to technology. In addition, the equity markets may reward “old economy” companies that appear to be successfully transitioning into “new economy” companies. On the other hand, cash-rich technology companies seeking revenues, earnings and tangible asset values, may find a merger or acquisition of an “old economy” company an attractive alternative – especially if equity markets and funding sources return to investment fundamentals.• Strategic alliances proliferate in the new economy. The so-called “new economy” encourages strategic alliances and partnerships. In addition to stimulating “buzz” within the equity markets, these alliances provide the players with much needed resources: capital, technology, content and market access, and numbers• Today’s private equity firms will be tomorrow’s sellers. Private equity groups have been active acquirers and investors. The holding period for these investors is three to five years. That being the case, as their holdings season and increase in value, the private equity groups may be looking to the M&A market to cash in on their holdings over the next few years.• Buyers Of Businesses Need To Make A Living Wage: It's a known fact that many business sales are structured so that the acquirers of businesses will be able to make a living wage and support the debt service. Many business sales must be structured to accommodate these requirements.
4. Seller Motivations To Sell
A recent survey conducted by a national consulting company provides insight into a seller’s motivation to sell their company. Owners of 300 privately held businesses that were sold or transferred were surveyed. It was found that maximizing financial return as their top succession objective. Next, was minimizing their tax liability followed by protecting the viability of the company, and then finally protecting employee jobs. The survey indicated that the “most widely cited ‘value driver’ for selling the business was the expected synergies from a sale or merger.” Accordingly, 45% of the owners had a continuing role within the company for an average of 4.4 years after the transaction. 5. Learn How To Value A Business
How do you calculate the worth of a small business? Forget about discounted cash flow or a multiple of earnings or assets. Forget all the yardsticks common to valuing larger corporations. Use an easier formula. A business is simply worth the total of inventory (valued at seller’s cost), equipment and fixtures (at fair market value), leasehold improvements (at fair market value), and one year’s net income. Additionally, non-cash flow items (depreciation and amortization) should be added back to net income because they represent an accrued expense for income tax purposes and does not affect cash flow. For example, interest expense should be added back to net income to compute an adjusted cash flow. It's assumed that the buyer of the business will not assume current debt. In most cases the Buyer is purchasing the business free of encumbrances resulting in a new interest expense. Officer's salary should also be added back to net income to determine cash flow. (This refers to the corporation, as the proprietorship does not expense Owner’s Draw). Officer's life insurance and automobile expenses should also be added back to properly reflect cash flow of the businessFringe Benefits should also be added back to net income to determine true cash flow. 1. Is the owner writing off expenses that are not essential to the day-to-day operation of the business?2. Are there personal expenses that are not necessary?3. Does the owner purchase equipment for home use and expense it through the business?4. Does the owner contribute to an officer’s pension or insurance fund?• The above items are needed in determining true cash flow of the business. In most cases the Seller will respond favorably to these questions. Keep in mind this formula is used for Asset Sales. Please contact a support representative at 614-790-1140 to discuss Stock Sales.Sometimes it is not uncommon to add additional value to businesses that are established five plus years. Up to 15% could be added to the selling price of the business. You can use almost any other business valuation method, but you’ll find you get roughly the same outcome. In fact, numerous on-the-spot business appraisals have been done for the courts when there has been partnership dissolution, an argument, and a death in the family where business ownership is a portion of the deceased’s estate. There are many other reasons for such appraisals when a determination of business worth is required. This formula is being used with increasing frequency because it works. Understand The Importance Of Down Payment When You Purchase A Business.... Typically a Buyer is willing to put a down payment in an amount equal to one year’s net before tax or debt service. If the down payment is less than one year’s net income (composed of Seller’s draw, depreciation, amortization, fringe benefits, company net, etc.), minus the applicable debt service payment, you will have a business that would be considered attractive to purchase.Down payment is an important concept to understand. Many owners of businesses seem to think they will get an all cash offer at closing. The majority of times this is an unrealistic request. The Buyer, by leveraging their initial investment, will usually be able to buy a larger company and immediately see an increase in yearly personal cash flow. For example, I've met a Seller who owns a light manufacturing company. They insisted that they would only sell their business if they would be able to obtain an all cash transaction at close of sale. The business is valued at $300,000. Therefore, based upon the Sellers request. The Buyer of the business will need to come up with $300,000 at close of sale. Rule of Thumb: The Buyer should be able to put down $100,000 at close of sale and finance the balance over five years at 10% (terms could be negotiated to be mutually favorable for both Buyer and Seller). If the Buyer would be required to put down $300,000 at close of sale, then the Buyer would be in a position to purchase a $900,000 business by investing the same $300,000 at close of sale. Also, the Buyer needs to understand the tax implications the Seller will incur by receiving a 100% cash offer. Once, the Seller understands their personal tax implications they probably will have a strong interest in building a stronger relationship with the Buyer and be in a positive frame of mind to accept owner's financing at close of sale. 6. Creative Ideas To Analyze Your Seller's Financial Statements
The procurement and reliability of the Seller's financial statements is the single most important factor that affects the ultimate sale of their business. From time to time, Buyers have a sense that Sellers will attempt to inflate the profitability of their businesses, and only in rare cases will the Buyer not want to examine the Seller’s books and records. This section will provide an introduction to the analysis of financial statements. The financial statement is defined as a report that accurately discloses the financial results of the business at the end of a fiscal period, usually a year. This statement includes the income statement, balance sheet, statement of retained earnings, and a statement of changes in financial position. It is recommended that the financial statement includes these statements, but it is sometimes impossible to obtain all the required reports, especially the statement of changes in financial position. Therefore, it is recommended that the income statement and balance sheet be acceptable for analysis purposes. 1. Income Statement. The amount of net income earned during a fiscal period, usually a year.2. Balance Sheet. This statement of assets, liabilities, and capital discloses the financial condition of the firm on a specific date.3. Statement of Retained Earnings. This statement contains the accounting period covered and shows the beginning balance in retained earnings, income earned for the period, dividends distributed, and the ending balance. This statement gives the reader full disclosure about the affect of earnings, losses, and dividends on the stockholder’s equity. 4. Statement of Changes in Financial Position. This statement is required by the Accounting Principles Board and is to be prepared in addition to the other statements to fully disclose the financing and investing activities as well as the changes in financial position if users are to make informed decisions about the business. This statement must show the inflow (source) of all financial resources, the outflow (application) of funds, and the net increase (or decrease) in the funds during the fiscal period. 5. Income Statement. The main purpose for analyzing this statement is to determine revenues earned, the costs incurred in earning these revenues, the operating expenses, and the resulting net income earned for the period. The main objective is to determine the earnings stream or cash flow of the business. Keep in mind that we are not concerned with overall performance standards, but the extent of the earnings stream prior to debt service and tax write-offs. This is being done to establish the Buyer’s cash flow. • Revenues. These are analyzed and recorded from the sales (top position) of the statement. A distinction must be made to determine the accounting method being used (cash or accrual).• Cost of Goods Sold. This section determines the cost of goods manufactured or sold, and relates to beginning and ending inventories. It should be mentioned that inventory methods can either overstate or understate the cost of goods sold disclosed on the statement, and therefore, inventory costing methods should be disclosed and final ending inventory based on physical counts and methods agreed upon.• Gross Profit. This is determined by subtracting cost of goods sold from revenues and should be compared to industry averages.• Operating Expenses. These expenses include fixed overhead and total operating expense of the business.o Officer’s salaries should be added to net income to determine cash flow. (This refers to the corporation, as the proprietorship does not expense Owner’s Draw).o Depreciation and Amortization should be added to net income because it represents an accrued expense for income tax purposes and does not affect cash flow.o Interest expense should be added to net income if current debt will not be assumed. In most cases the Buyer is purchasing the business free of encumbrances resulting in a new interest expense.o Automobile expense is added to net income.o Officer’s life insurance is added to net income.o Fringe benefits are added to net income. Is the owner writing off expenses that are not essential to the daily operation of the business? Are there personal expenses that are not necessary? Does the owner purchase equipment for home use and expense it through the business? Does the owner contribute to an officer’s pension or insurance fund?• The above items are needed in determining true cash flow of the business. In most cases the Seller will respond favorably to these questions.6. Balance Sheet The balance sheet is an integral part of the financial statement, which shows the financial condition of the business as of a specific date. This report indicates the assets, liabilities, and owner’s capital, usually at year-end. Specifically, it indicates how the profits shown on the income statement have been invested into the business. The following equation can be used to illustrate the nature and use of the balance sheet:ASSETS = LIABILITIES + OWNERS’ EQUITY Assets are the economic resources owned by a business that are expected to assist in the earning of revenues in the future. Liabilities are financial obligations to outside creditors. Owners’ equity is the claim the owners have on the assets of the business. The assets of a business are generally subdivided into the following categories:o Current Assetso Investmentso Property, Plant, and Equipmento Intangible Assetso Other Assets The balance sheet can be analyzed to determine a firm’s liquidity (short-term debt paying ability), profitability, leverage (the extent the firm is financed by outside creditors), and equity. It is recommended that the tests for liquidity and profitability be performed prior to recommendations or advice on valuation. Current assets can be compared to current liabilities to determine the short-term debt paying ability of the business. If this ratio is less than 2 to 1 then it is recommended that the composition of current assets and current liabilities be analyzed further because the firm is in a very non-liquid position. In addition, the inventories should be subtracted from current assets and compared to current liabilities for another test for liquidity. (A favorable rating would be 1:1.) Liabilities are shown as current liabilities and long-term liabilities. The owners’ equity section of the balance sheet differs depending on whether the business is organized as a proprietorship, partnership, or a corporation. Liabilities are separated into current (due within 12 months) and long-term (due longer than 12 months). 1. Accounts payable includes current obligations of the firm for operation expenses and the purchase of merchandise.2. Sales taxes & payroll taxes payable are current tax obligations that must be paid during the current year. The business is responsible for these obligations even during a change in ownership. 3. Notes or contract payable are debts (secured or non-secured) owed to banks, financing institutions, or individuals. The amount on the balance sheet is the principal balance as of the balance sheet date. Owners’ Equity or Net Worth is defined as the assets less total liabilities. This section will be called “Stockholder’s Equity” in a corporation and “Capital” or “Owners’ Equity” in a proprietorship or partnership. In the corporation, the stock issued and outstanding will be shown in addition to current earnings and retained earnings. SUMMARY: The recommended analysis has included some basic methods for determining the financial health of the business and to assist in the sale process. In addition, it also provides valuable information required in the negotiations between Buyer and Seller. It is recommended that financial statements be obtained or compiled from the Seller’s records to establish the “true” earning stream of the business. 7. Advertising For Qualified Sellers
Advertisements should be brief and bring out the best and most saleable points of your business ownership or management experiences as well as give some indication of financial strength. It is advised that you keep your name confidential; however, it is appropriate to indicate the category of business you are seeking. Ads should show a range of purchase prices you could realistically afford (this will minimize frustrations when you begin negotiations). Remember your ad should be catchy and draw the attention of the reader. You want to include just enough information to draw the readers’ attention and curiosity. Sample Advertisement:Motivated Buyer - Local Buyer interested in purchasing an established business. Experienced in managing and handling cash flow. Looking at businesses that range from $100,000 - $300,000 in sales price. Terms negotiable. Serious inquiries please reply to............... Where to place Advertisements: Local Newspapers. The major local newspaper is historically the very best choice. Typically, most newspapers have a “Business Opportunities” classification. I strongly recommend the Sunday edition, which has, without question, the best qualified Sellers. The Monday and Wednesday editions are a good secondary choice to follow-up replies. National Publications. Advertising in these publications (i.e. The Wall Street Journal) is expensive but sometimes worthwhile. Such advertisements are beneficial when dealing with a business whose sales price is a substantial six or seven-figure sum or more. Trade Magazines/Other Local Publications. Use these only as secondary sources. Historically, advertising in these magazines has resulted in minimal response. 8. Telemarketing For Qualified Sellers
Telemarketing is my favorite selling technique. It takes some time to get comfortable with calling Business Owners directly during the day. If you have sales experience and feel comfortable with telemarketing, using this technique is highly encouraged. Your primary objective is to uncover qualified Sellers who will eventually be motivated to sell their company. Keep in mind, it takes time to develop a relationship with a Seller. The more comfortable the Seller feels with the Buyer, the easier it becomes for the Seller to provide information such as financial statements, customer lists, and the business processes of the company.Contact Management Software. It's very important that you use a contact management program to track your daily activity. I recommend either ACT for Windows or Microsoft Outlook. These programs allow you to customize the screens and maintain information on Seller personal profiles as well as business issues. You can refer to this information at anytime and have a comfortable conversation with the Seller about their business while maintaining a strong degree of confidentiality. These systems also come with automated tickler systems that alert you when you should initiate follow-up communication with a phone call or letter. Again, your primary objective is to develop and strengthen a relationship with a qualified Seller that one day will become a motivated Seller. The Seller has an interest to maintain a relationship with the Buyer because when they truly decide to sell their business, they need to begin to find motivated buyers like you and keep their strategies confidential. Target Your AudienceYou could narrow down your prospective audience of business owners by using a Contact Management Software Database Program. You can purchase one of several CD-ROM Telephone Directories at local computer stores (these programs cost up to $200). I use "Powerfinder - PhoneDisc" and it is very accurate. These programs are user friendly and easy to work, but they usually do not come with the owner's name. However, when you contact the business the majority of the companies will give you the business owner's name and/or president of the company. Additionally, the programs allow you to download the company names and addresses to the most popular contact management software programs. Other effective databases could be obtained from your Chamber of Commerce as well as newspapers and magazines that compile business owners' names, company names, SIC codes, addresses and phone numbers. Once you have selected your target audience and have uploaded the names to your Contact Management Database Program, you can send an introduction letter as follows: Introduction LetterAn introduction letter to a business owner is very effective in locating a qualified Seller. The letter should state that you have an interest in purchasing a company similar to the products and services they offer. Mention your strengths and highlight that you have an interest in purchasing a business within the next 180 days. If your target audience is small, try to personalize the letter by hand writing on personal stationary while maintaining a professional writing style. In the letter, it is very important to include a specific date and time you will contact the business owner. Also share that you're interested in the purchase of a business within a certain price range. This will allow you to qualify the Sellers initially and not keep the seller's expectations high. Surprisingly, when you contact the business owner at the date and time you suggested, the majority of times the owner will take the call. When you have the owner on the phone, re-introduce yourself and give a quick synopsis of your personal acquisition goals and time frame. Then ask the Seller some questions about themselves. It's best to have them continue a dialogue. You should try to spend no more than ten minutes on the phone with the Seller. Next, schedule either a lunch or introduction meeting. If possible, meet at their business. If the Seller is uncomfortable with this thought suggest meeting off premises at either a restaurant or coffee shop. People tend to become more relaxed when they are eating and/or drinking. For sample letters and/or telemarketing scripts please e-mail our office at your convenience. 9. Handle Seller's Replies
When you're meeting the Seller for the first time it's very important to listen. Develop a relation with them and try to determine the reason for sale. Many times the Seller will highlight their motivations for selling their business. Sellers who are financially strapped will be pro-active about timeframes (i.e.. closing dates, etc.). They will seem hurried and impatient. When you meet Sellers similar to this attempt to have them relax and discuss their personal situation. You should be able to determine if the Seller is losing their company (bankruptcy, customer base, etc.). Unless you are looking for a turn-around, you may want to pass on that Seller. However, you can still log them in your contact management program. Also, if you continue to have an interest in the company subsequent to this initial meeting, try to see the business as soon as possible to qualify the business to your personal likings. Keep in mind there is no perfect business 10. Learn To Qualify Your Sellers Quickly One of the most serious mistakes you can make is trying to buy a business and not qualifying a Seller. When you completely qualify a Seller, you may then determine if they are really a Seller, what type of Buyer they would like to develop a relationship with, follow-up with the Seller properly, and control the sale. 1. Determine the seller’s precise liquid cash requirements. Don’t be mislead by a claim of, "I must have $1 million dollars in cash at closing." All business sales must be a win-win situation. The Buyer must be able to make a living wage and support the debt service in most of the cases and the Seller must be able to be 100% comfortable with the price and terms. The stronger the relationship, the better. The Seller will be more comfortable to structure a transaction with someone they trust and have confidence in. 2. Explain to the Seller your financial requirements. If handled properly, the Seller will understand that you will not be able to work in the business for five years and not make a living wage if the price is to high or the terms are unrealistic. Once the Seller has confidence in your abilities they will structure a mutually favorable transaction. 3. Keep in mind that even though the Buyer is extremely qualified to purchase the business, the Seller may not feel comfortable with the Buyer personally. This is very important when trying to negotiate a mutually favorable transaction. I would recommend finding another company. Otherwise, both parties will become frustrated and no transaction will ever take place. 4. Fully explain the concept of Seller’s remorse. The following is the information you MUST obtain from your prospective Seller.• How long have you been considering to Sell your company?• Is your spouse comfortable with your decision to Sell?• Personal debts required paying off at closing, if possible.• Current tax returns and financial statements.• How long will the Seller train you in the business?• Why does Seller want to sell their business?• Income required subsequent to the sale. Miscellaneous – A Few Additional Items to Expect and Control: The Wife – She must be involved from the outset. Without her blessing, there will be no sale. Anticipate and control this. When you are with the man and his wife, focus your attention and conversation on her. Recognize that the wife is the one who will generally make the ultimate decision. Do not pressure your prospective Seller. Suggestions are more effective. Listen, Listen, Listen. The problem with most people is they like to talk to the extent that they do not listen to what the Seller says. A sale should fulfill a “need” or “desire”. What is the Seller’s “need/or “desire” 11. Buy A Business From A Qualified Seller Remember, a Seller always buys the salesman first, and the product second. Establish complete honesty as your priority. Never make the mistake of bending the truth. You may win initial points with the Seller by raising their hopes, but in the end, when all the facts are known (and this will always be the case), you will have destroyed your rapport with the Seller and decreased the possibility of closing your sale. Follow these steps after you have qualified your Seller,and, after your prospective Seller has an interest in you. Arrange for a physical tour of their business premises (They probably will have you sign a Confidentiality agreement prior to releasing additional company details and/or company tour - this is common). I strongly encourage your prospective Seller to have his wife attend as well. Remember, 99% of the time it is the wife who will make the ultimate decision. Control the initial portion of the meeting. Encourage a dialogue between yourself and the Seller. It’s important that you get comfortable with the Seller. When the meeting comes to a closure it’s important for you to ask the Seller what they really think. Listen and take notes. If the Seller displays a negative reaction:Find out why. If their feelings are strong, don’t try to talk your Seller back into it. Find another company to purchase. If your Seller keeps coming back to you or continues a dialogue, you will know your Seller is truly interested and wants you to play the role of talking them back into it. Don’t succumb to this. Make your Seller talk you back into discussing the purchase of their business. If you’re Seller has a favorable attitude towards selling their business to you,Find out why and close. Sometimes it helps with the psychology of the sale when the Buyer suggests that they should keep their business and not continue the sale process. Get your Seller to fight to continue the conversation on selling their company. Find out exactly what needs to be done to complete the sale. Then establish an orderly program to overcome the Seller ’s objections. Learn to “Line up all the ducks in a row and then knock them down.” Psychology of the Sale - Be on The Alert if Reversing Happens Reversing Psychology of the Sale Reversing is defined as a method of accomplishing a desired result, wherein the user “takes away” the sought after result he wishes to achieve. The motive: to make the person fight to “get it back”. Reversing can be an extremely powerful tool for you to use under appropriate circumstances, if used properly. Example situation: Your Seller, Bill Jones, has executed your purchase contract and receipt Thursday morning. By Thursday afternoon, you have placed the sale into escrow. At 8:00 pm that night, the Seller calls you at home and explodes with Seller ’s remorse. He tells you he is uncomfortable and panicky about the sale. What do you do? The worst approach: While on the phone you say, “Well, Bill, tell me precisely what is bothering you. I’m sure we can work it out.” This approach will probably do you no good whatsoever. First, you will never accomplish anything on the phone. Only one-on-one contact will work. Second, listening to his/her complaints and trying to correct them will probably not work. The reason – emotions are now heavily in play. Common sense explanations will serve only to worry the Seller more. He will become extremely defensive and withdrawn. A much better approach: “Bill, you are obviously upset. I doubt that we’ll be able to accomplish much on the phone now. I’ll be in my office at 9:00 am sharp in the morning. Why not meet me and we’ll discuss this at length.” (Take pressure off.). When you arrive at Bill's office, tell him, “Bill, I’ve been thinking this over. You are obviously uncomfortable about the sale and I certainly wouldn’t want you to proceed. So let’s just forget about it. You may want to take your business off the market.Your immediate goals: Take the pressure off! Your more immediate goals: to make the Seller fight to re-open the conversation on the contracted sale. He may say “But I signed a contract. How can we just forget about the sale?” Your reaction, “Don’t worry”. REMEMBER: The longer you “take it away”, the better your result should be in “reversing” the Seller back into the sale. Your best chance at accomplishing this is by removing the pressure. The tactic of, “You’ve signed a contract, you’re stuck, it’s too late," will only make the Seller defensive and drive him to an attorney. Reversing really takes courage but it works much more often than not. Continue the process. Anticipate what might be causing the Seller's concern. Deal immediately with those concerns, even if they are only potential concerns. If you do not, they will grow into concerns that will block an ultimate sale. Continue to anticipate. For example, if the Seller has not sold a business before, he may be unfamiliar with the paperwork to come. Give him a copy of a contract. Let him take it home so that when the time comes for him to sign the purchase contract, he will not be afraid of its appearance or content. Control the initial portion of the meeting. Encourage a dialogue between yourself and the Seller. It’s important that you get comfortable with the Seller. When the meeting comes to a closure it’s important for you to ask the Seller what he really thinks. Listen and take notes. If the Seller displays a negative reaction:Find out why. If their feelings are still strong, don’t try to talk your Seller back into it. If your Seller keeps coming back to your business or continues a dialogue, you will know your Seller is truly is interested and wants you to play the role of talking them back into it. Don’t succumb to this. Make your Buyer talk you back into discussing it. If you’re Seller has a favorable attitude towards buying your business: Find out why and close. Suggest other opportunities. Get your Seller to fight to continue the conversation. Find out exactly what needs to be done to complete the sale. Ask yourself, “’What is stopping the Seller?" Then establish an orderly program to overcome the Seller ’s objections. Learn to “Line up all the ducks in a row and then knock them down. 12. Learn How To Close The Sale If the Seller contacts you and is very interested in accepting your recent offer either by a letter of intent and/or a formal purchase contract. Please follow the following steps: • Calm down and take a deep breath.• Make certain there are no contingencies in the sale. The Seller can cause a lot of emotional pain by requiring you to go through hoops and no sale will come out of it. If contingencies cannot be avoided please strongly advise that these contingencies must be taken off within ten days.• Pin down an anticipated closing date.• Obtain the Seller ’s current financial statement. Make sure the financial stability is still there. Maybe something happened recently to cause a decline in company sales. Selling the business could be the quickest out for the Seller.• If the Seller requires more than you can financially handle, be kind to the Seller and explain the importance of your original purchase price. Unless the Seller decreases his offer it’s important to tell the Seller you need some time to think about his offer. Always Be In A Position To Walk Away From A Company. • Remember that if you and/or the Seller need to make changes to the purchase contract it is important to obtain initials and dates on the contract Control again is the key. It has been said that the easier part of business sales is getting the Seller to make an offer, and having the Buyer accept it. There is much truth in this. However, you must learn not only to resolve problems, but also to anticipate them by interpreting the series of events that have brought you to this point in the sale. Only then will you be able to maintain control, and your ability to purchase a business. Neither high pressure nor low-pressure sales techniques, nor a combination of them, nor your brand of selling will carry much impact without anticipation and control.What to look for? Seller ’s Remorse: Seller ’s remorse in varying degrees will be inherent in every sale. A Seller will always question the decision he has made or is about to make. Count on it, anticipate it, and control it. Seller ’s remorse will peak immediately after or shortly after he/she signs the contract. He may become aware of all of the things that can go wrong, he may feel uneasy and unsure of his decision, he may remember all of the little things he forgot to check into that he now feels will create grave consequences to him. It is up to you to anticipate and control Seller ’s remorse: • Earnest Money: We strongly recommend not presenting a check for earnest money until the moment you are ready to write a purchase contract. We know the writing of this check may serve as a possible catalyst to a potential severe Seller's remorse syndrome. Because this is anticipated, we can control it by not presenting this check until the proper time. Strengthen your relationship with the Seller until the Purchase Contract and Earnest Money Check will be required.• Contracts with Contingencies: Again, since we anticipate and are aware that Seller ’s remorse may appear, we can control it. Do not write contracts with contingencies or conditions. Before the ink is dry, Seller ’s remorse will begin and your contract may well turn out to be worthless. When a purchase contract is executed, it must be a totally binding document.1. Company Financial Information - Sellers will often insist on receiving an offer prior to the Buyer's review or their accountant’s examination of the business books and records. Insist that the books and records be checked prior to the contract.2. Lease Assignments - Before writing the contract, talk to the landlord. Obtain at least a verbal ok from the landlord that he will approve the assignment. But again, anticipate and control. Do not write a contract subject to approval of lease assignment.3. Financing - If the Seller is to have you assume a bank credit line, make sure you meet their bank representative before writing the contract. If you are to assume any equipment leases, again obtain all lease approvals prior to writing the contact.4. Attorney Review – The Seller will almost always request the opinion of their attorney for advise and draft the purchase contract. Tell the Seller that you were not only going to recommend that they consult an attorney, but that you were going to demand it anyway. You will win big immediate points with the Seller. But again, anticipate and control. Most likely this will be a contingent item in the contract. Try to keep the date of attorney’s review less than one week from mutually agreeing to the terms of the contract.Also, as discussed before, if you review a sample purchase contract early in your sales cycle with the Seller the purchase contract will be less intimidating.5. Miscellaneous - Eliminate all contingencies, actual or potential, before writing a contract.Back to Top 13. Handling Seller's Remorse Be proactive in controlling Seller remorse. Create a psychological advantage. Make the Seller feel that you are trying to help him, not pressure him. Tell the Seller that you insist that “all cards be on the table” before you will even discuss a contract or check. You will win big points with the Seller and strengthen your rapport with him by dealing in this way. But more importantly, you will have held off possible Seller ’s remorse until the proper time. You will have anticipated and controlled it.Read Reversing For Tips on Handling Seller's Remorse. 14. Lawyers And Accountants Many attorneys and accountants that I have worked with attempt to be professional in structuring a transaction. Usually they will attempt to find a win-win scenario. If possible, try to develop a friendly relationship with your Seller ’s professional council. However, most attorneys and accountants representing the Seller will maintain a distance so that they can control negotiations relating to their client’s transaction. Many times the Buyer would be better off hiring a professional advisor to assist in handling the negotiations with the Seller and/or Seller ’s legal council. Also, if the Seller begins to distance themselves during the negotiation stages it may be helpful to have your professional advisor handle the negotiations.