Selling a Business

Increasing the price of your products or services is, in most cases, the most difficult decision a business owner has to make. Looking at the negatives is easy.

•    Our business is too competitive to increase prices.
•    Our customers/clients are used to our pricing.
•    Customers are too price-conscious.
•    We won’t be able to get new customers/clients.
•    We are known for low prices.
•    We have a lot of repeat customers, they won’t pay more.

The list of reasons why prices shouldn’t increase could go on and on. The fear is always that people won’t pay the increase and profits will suffer.

Before considering a price increase, one must look at their current pricing method. Do you work on a cost plus a certain mark-up? If you use a mark-up percentage, are all items marked up by the same percentage? Do you try to maintain a price comparable to the competition? If you work on an hourly rate, for example consulting, when was your last increase? Have costs increased and have you increased prices to compensate for them?

Looking at the positives is also easy. Profits will increase; and the price of the business will increase based on the increase in sales and profits. Funds will be generated to do that advertising or promotion you have always wanted to do. With increased profits you can hire that extra salesperson you know will increase business; you can install the technology you know will increase service and lower costs.

As Ravi Mohammed said in his book, The Art of Pricing, “Let me ask you, will a 1% price increase really cause your customers to stop purchasing from you?” A 1% increase on a business doing $5,000,000 a year is $50,000 to the bottom line. On a business with sales of just $500,000, a price increase of only 2% would bring in $10,000 to the bottom line.

One does not need to increase prices across the board. On fast-selling items, increase the price more than on slow-moving items. By doing so, you can test the waters on increasing prices. As Ravi Mohammed also points out, “McDonald’s profit on hamburgers is marginal, but it has substantial profits on French fries and soft-drinks.”

You many decide not to increase your prices, but at least you have taken a look at your pricing policies.

When is the last time you reviewed the lease on your business premises? When you signed it years ago?  There are some important reasons that should prompt a business owner to revisit the terms of his lease. If you can’t assign your lease to a new owner, you may not be able to sell your business. A similar concern is that if you can’t assign the lease, it may cost you a lot of money. This means that the landlord may want what could be termed as a “transfer” fee; or the seller may have to reduce the price accordingly. Whether you are thinking of selling or not, it is a good idea to review your lease and the transfer of lease provisions.

It’s also a good idea to check what happens at the end of the lease. Is there an option to renew and if so, how soon before the termination of the lease do you have to notify the landlord? And, just as important, do you want to stay, or is it time to move on?

A recent article in the New York Times titled “Thinking Past Location in Finding Space” said: “With rent typically the second largest expense after salaries for small business, and with office occupancy costs up sharply in many markets, a simple miscalculation can cost an entrepreneur her business.”  An existing lease may make it difficult to negotiate a lower rent with the landlord, but it may be worth a try. If the rent is benchmarked with similar businesses, a landlord may be convinced to make some adjustments.  Landlords don’t like late rental payments and they especially don’t like going through the eviction process.

If you are just now looking for space for a new business or if it’s time to move into new space, here are a couple of things to keep in mind when reviewing a new lease.

• The first thing to do is to find an attorney who is experienced in leases—this will be an excellent investment.
• If the business requires a lot of space or if location is critical, engaging a commercial real estate broker who represents tenants is also an excellent investment.
• Keep in mind that landlords want to pass on as many of the costs of leasing property as they can. Taxes, landscape upkeep, parking lot maintenance, shopping center advertising and promotion—the list is endless. The good news is that if they are looking for tenants they may negotiate on some of the items.
• Always ask the landlord for enough free rent to pay for the move into the new facilities or ask to have the premises remodeled for your particular usage.
• Make sure the space works for your business requirements. Is the parking sufficient? If the premises are inside a building, do the hours it is open work for your business? Do the premises have the necessary hook-ups for your needs? And, most important, does the space under consideration allow you to expand, grow – meet new requirements, etc?

By following the points outlined above, your new business or your new space should allow you to build or grow your business. If you’re in an existing space, some of these strategies may allow you to renegotiate your existing lease, or make some beneficial changes when you renew it.

The obvious answer is probably that most people are looking to buy a business that makes a lot of money. But the real answers may surprise you. Here is a list of just a few that buyers have mentioned:

•    Pride of ownership
•    A business that looks like fun to own and operate
•    Happy employees
•    Financial records that make sense
•    Good growth prospects
•    A well-known or popular business
•    A good track record
•    A great location
•    A seller who is willing to finance the sale
•    A reasonable price

Certainly, a buyer wants to make money when buying a business, but there is more involved, as the list above indicates. If you’re even thinking about selling, a visit with a business brokerage professional will pay big dividends by finding out what local business buyers are really looking for.

A recent survey asked leading business brokers and intermediaries: What is the seller’s biggest obstacle to selling the business? In other words, why do business owners who are considering selling fail to follow through?

Seller’s Biggest Obstacle to Selling

The answers to this question were revealing, fascinating and important for prospective sellers to understand and consider prior to placing their business on the market.

The biggest reason was one that most people would guess—price. Here are a few explanations that sellers offered concerning price:

•    Price—net amount after tax proceeds

•    Never enough dollar value in the deal, after taxes, lawyers, accountants, brokers

•    Price justification

•    Price versus offer

•    They don’t want to accept the market price of the business

•    Price does not meet owner’s retirement needs

•    Understanding that valuation is based on historical cash flow rather than “potential” cash flow

•    Perception of value of their business in the marketplace based on reliance of an ill-informed source

Price was the area most mentioned (by far) as the reason sellers don’t sell or, not to mince words, why businesses don’t sell. A professional business broker is aware of local market conditions, has comparable sales data available and is knowledgeable in pricing businesses.  Keep in mind that the ultimate decision-maker in determining a selling price is the marketplace. If you are not willing to accept what the market is willing to pay, then you should reconsider your reasons for selling—and read on.

The Next Biggest Obstacle

Two obstacles other than price were mentioned more frequently than any others.  One of these had to do with books and records—or the lack of; and the other was a fairly new obstacle—seller’s remorse. You read that right: not buyer’s remorse, but seller’s.  Here are some examples:

•    Money/letting go

•    Motivation

•    Giving up business

•    Price and emotional ties

•    What are they going to do after selling?

•    No more income stream

•    Being ready to really let the baby go

•    Motivation to actually sell when the offer comes

•    Can’t afford to retire

•    Pricing, indecisiveness (family/friends advise)

The point here is that sellers really shouldn’t put their business on the market unless they are totally convinced that they want to sell. Check with your business advisors, family members, and most important of all, ask yourself if this is really what you want to do.

Financial Information

Although inadequate books and records, etc., probably cause more difficulty than seller’s remorse, this subject is far less emotional than whether you really want to sell your business.  Although it deals with straightforward numbers rather than emotions, it still takes its toll. Too many sellers wait until they have made the decision to sell and are ready to put their business on the market before they realize that their books and records don’t measure up to a buyer’s expectations. Today’s buyer wants to see everything in black and white; they are not willing to accept a seller’s version of sales and profits. If you are even considering selling your business, now is the time to go to your financial advisor, accountant, or CPA and have your financial records put in order in such a way that the information can be verified and a buyer or his or her financial advisor can easily access them. Contact your business brokerage professional, who can advise you about what buyers are really looking for when examining a seller’s business financial records.

Needless to add, but worth adding anyway: proper record-keeping should be done on an ongoing basis rather than on the eve of the decision to sell.

You’re considering selling your business.  Your accountant or financial advisor has reviewed your profit and loss statement, and told you what he or she thinks your business is worth. Is this a valid figure? Do the numbers reflect the real value of your business? Below are some other factors to consider regarding the true value of your business. These factors may not have a specific dollar amount attached to them, but they certainly influence value and the price a business may sell for.

•    Are you serious about selling, and is it the right time? (Use this only if selling is the reason for the valuing.)

•    What are the two or three biggest obstacles to growing the business?

•    Why is your business different than the competition?

•    If you don’t own the real estate, what is the status of your lease?

•    What is the short-term and long-term trend of your business and the industry?

•    Does, or can, international competition impact your business?

•    Why do customers patronize your business, or why do clients use your services?

•    Have you increased prices recently, and if not, why not?

•    How much will you need to invest in your business over the next three to five years to maintain your customer/client base? How much to increase it?  How will you spend it?

•    Are there any legal or governmental issues facing the business?

•    If you got hit by the proverbial truck, is there someone who could run the business?

•    Can the business be relocated? Should it be relocated?

•    What are the secrets to the current success of the business?

•    What prevents the business from growing?

•    If the business is based on your personal goodwill with customers, knowledge of the product or services, etc., are you willing to stay for a fairly long period of time to assist in transferring this personal goodwill?

•    If you were given an additional $100,000, and you were much younger, what would you do to grow the business?