Blog – Arthur Berry & Company Arthur Berry & Company Wed, 21 Jul 2021 21:09:11 +0000 en-US hourly 1 Blog – Arthur Berry & Company 32 32 When Selling, Do-It-Yourself Is a Risky Business Tue, 06 Jul 2021 22:38:45 +0000

When the owner of a business makes the decision to sell, he or she is taking a giant step that involves the emotions as well as the marketplace, each with its own set of complexities. Therefore, those sellers who are tempted to undertake the transaction on their own should understand both the process and the emotional environment that it’s set against. The eight must-dos outlined below—just some of the items for a successful sale—might seem daunting to the do-it-yourselfer. However, by engaging the help of a business intermediary, the seller can feel confident about what is often one of the major decisions of a lifetime.

1. Set the Stage: What kind of am impression will the business make on prospective buyers? The seller may be happy with a weathered sign (the rustic look) or weeds poking up through the pavement (the natural look), but the buyer might think only—what a mess! Equally problematic can be improvements planned by the seller that appeal to his or her sense of aesthetics that but will, in fact, do nothing to benefit the sale. Instead of guessing what might make a difference and what might not, sellers would be wise to seek the advice of a business broker—a professional with experience in dealing regularly with buyers and with an eye experienced in properly selling the business scene.

2. Get the Records Straight: Although outward appearance does count, what’s inside the books is even more important. Ultimately, a business will sell according to the numbers. The business broker will offer the seller invaluable assistance in the presentation of financial records that are current and crystal clear.

3. Weigh Price Against Value: All sellers naturally want to get the best possible price for their business. However, they also need to be realistic. To determine the best price, a business broker will use industry-tested pricing techniques that include ratios based on sales of similar businesses, as well as historical data on the type of business for sale.

4. Market Professionally: Engaging the services of a business broker is the key to the successful marketing of a business. He or she will prepare a marketing strategy and offer advice about essential marketing tools—everything from a business description to media advertising. Through their professional networks and access to data on prospective buyers, business brokers can get the word out about the business far more effectively than any owner could manage on an individual basis.

5. Negotiate Wisely: The business broker will be the most vital advisor to sellers during any stage of the selling transaction. This professional is an expert at negotiating price, terms, contingencies, and other key aspects of the sale. During the early stages, while the buyer is still considering making an offer, the broker is the ideal person to follow up and keep the deal running smoothly. Sellers working alone risk losing bargaining power by doing the follow-up themselves.

6. Attend to Details: Most business owners are masters of detail—and the accompanying paperwork. However, few of them have training in or knowledge about the specialized contracts and forms required for the sale of a business. The business broker is an expert at sales transaction details. This expertise will help guard against the delays, problems, and misunderstandings that can result in a wrecked deal.

7. Qualify Prospective Buyers: The business broker will determine the right buyer for the right business, focusing on those prospects who are financially qualified and who are genuinely (or potentially) interested in the type of business for sale. A business broker uses electronic databases to access comprehensive lists of local, national and international buyers to increase the chances of selling a business at peak value. And almost as important—the business broker qualifies every prospect to avoid wasting the seller’s valuable time.

8. Maintain Confidentiality: Until a purchase and sale agreement has been signed, most sellers do not want news of the process to reach their customers, competitors, employees, or in some cases, even their bankers. By involving a business broker in the transaction, sellers can more easily maintain confidentiality from beginning to end. The business broker will use nonspecific descriptions of the business, will require signatures on strict confidentiality agreements, will screen all prospects, sometimes phasing the release of information to match the growing evidence of buyer sincerity and trustworthiness, and in general will use his or her position as intermediary to provide the seller with a protective shield of privacy.

Professional business brokers help the seller perform all of these vital steps. This is a time when do-it-yourself is not a cost-effective measure. The success of the sale depends upon the seller’s dependence upon the best professional help.

From Today’s Business Scene published by Business Brokerage Press

Tips for Business Sellers Tue, 06 Jul 2021 22:17:22 +0000

Those business owners who decide to take advantage of a favorable market should act quickly to launch the selling process. There are vital steps to take—and crucial realizations to face—in preparing for this all-important transaction.

1. Resolve current problems as soon and as thoroughly as possible. If the business is a partnership, both parties should be agreed about the major decisions to be made in the selling process. Hopefully, in cases where the business is a partnership, a buy-sell agreement is firmly in place.

2. Financial records must be accurate, up-to-date, and impressive indicators of the owner’s business ability. Some buyers may be willing to buy potential, but they don’t want to pay for it. In fact, sellers should be open about all aspects of the business that might affect the sale; otherwise, once the real facts are revealed (as they inevitably will be!), the sale may be lost.

3. Sellers must understand from the beginning that they may have to help finance the sale. The seller’s business broker, in qualifying potential buyers, will also assess their financial credibility and their ability to run a successful business, thus helping to take the understandable fear out of seller financing.

4. Sellers should also seek the advice of a business professional in determining price. The business broker will apply industry-tested valuation methods, an will incorporate those intangibles to be ensured that the business will not be under priced. At the same time, the business broker will point out to the sellers how the price is dictated by the marketplace and that realistic pricing is an absolute must. Most buyers faced with an out-of-sight price won’t wait for it to drop—they’ll just go elsewhere.

5. In marketing the business for sale, sellers benefit many times over from the guidance of a business broker professional. The business broker who lists the particular business for sale represents the seller an works toward completing the transaction in a reasonable amount of time and at a price and terms acceptable to the seller. The broker will also present and assess offers, and, at the appropriate juncture, he or she can also help in structuring the sale transaction itself. The broker and the seller become a team, involved in the relationship of mutual trust, with the common goal being the successful business sale.

If you have made the decision to sell your business, the wisest first move is to contact a qualified business broker professional, who can…

  • Advise you on pricing and structuring the sale of your business.
  • Prepare the marketing strategy, using professional resources.
  • Determine the right buyer for your particular business.
  • Educate buyers in the business-buying process.
  • Keep you informed about market reaction.
  • Present offers and point out strengths and weaknesses.When it comes time to sell, one of the best decisions a business owner can make is to continue managing his or her business efficiently (and profitably), while depending on the services of a business broker to forge the steps of the sale. The business broker professional is an invaluable advisor during the entire process, offering both objectivity and negotiation skills honed through years of experience in the buying and selling of businesses.


About the Author:

Mr. Tom West is the editor/publisher of The Business Broker, a monthly newsletter for the business brokerage field. He has written or co-written numerous books including The Business Reference and Pricing Guide and The Resource Handbook for Business Brokers. He is a founder, past president, and former executive director of the International Business Brokers Association (IBBA). He is a frequent lecturer and seminar leader on all aspects of buying, selling, or appraising a business.

4 Basic Steps in Selling Your Business Wed, 23 Jun 2021 21:31:12 +0000

Making a decision on when to sell can be difficult and emotional. For those of you that started a business from scratch or held it together during rough times, that decision will be even harder. Here are some basic thoughts to help you through the process.

1. Getting ready to sell.

As with any item that is sold or bought, the first “appearance” is a lasting image, which is the same for a business as well. Getting all the financial information together to include full descriptions of all assets, earnings and information is the first step and part of the overall image. If there is physical location involved, take time to do all the things you keep putting off doing. Fix it! Paint it! Repair it! All before you make the initial visit with any buyer.

2. Form a reasonable value for the business.

Seeking a professional broker’s advice or a trusted banker can make a lot of difference in your attitude about selling. Most of us have some emotional stakes that need to be discussed. All those years of hard work do amount to something, but the something has to make sense to a buyer too. If you envision your business like an old fashioned milking stool with three legs, you’re on the right track. One leg is the value you think it is. Usually it’s the longest (larger in value) leg; next, is the buyer, who will want to obtain the best deal they can and, finally, is the financing agency’s leg which is the real world’s ability to actually fund a sale. You have to get all three legs to be the same size or it will never sell.

3. Advertising the opportunity.

Putting up a for-sale sign usually isn’t what everyone wants to do. It labels the opportunity “going out of business” and that’s usually too far from the truth, but it does work to tell people you’re for sale. Be prepared to let people know it’s for sale. Keeping the sale confidential has some advantages so finding the right combination of help is up to you. There are many agencies that abound with individuals who specialize in advertising on-going-concern sales. Seek them out and ask them questions. See what they think the value is before you tell them what you already know. Look at their record of selling your type of business, but you have to get the word out if you want to truly sell.

4. Finding a buyer and structuring deals.

Information on this step comes later, but knowing what you will go through is important. Know what due diligence is and how it will require your help is important. Know what the current bank requirements are for selling so that you’re prepared to accept reasonable offers that don’t waste your time. Deal structures that include all aspects of financing, legal and transition should be accomplished with professional help especially so with contract sales. Seek legal advice and counsel to be sure.

Business Owners Who Take time to Plan Exits Increase Chances of Success Wed, 23 Jun 2021 21:07:37 +0000
“To will is to select a goal, determine a course of action that will bring one to that goal, and then hold to that action till the goal is reached. The key is action.”
— Michael Hanson


If the thought, “Why exit plan when I can’t sell my business now or anytime soon?” has crossed your mind, consider the case of fictional owner Rudolfo LeMonde.

Rudolfo LeMonde’s hospitality services business had grown steadily until the last few years. Although revenues had flattened, Rudolfo maintained profitability by reducing overhead and working more hours.

This was Rudolfo’s situation when a would-be buyer approached. At age 55, Rudolfo hadn’t actively considered selling his business, but was beginning to think that life after work might have something to offer. His business wasn’t providing as much fun as his other activities, especially since business growth (and more importantly, profitability) had been slowing for the last two years.

Rudolfo scheduled an hour to talk to that interested buyer and in 60 minutes, his eyes were opened and his priorities turned upside-down.

The buyer, a large national company seeking to establish a presence in Rudolfo’s community wanted, like most buyers, to acquire a business that could grow with little other than financial support and the synergies it brought to all of its acquisitions.

This meant it sought companies with a number of characteristics that we call value drivers. In future newsletters we’ll discuss all the value drivers, but for now some important ones are:

  1. Capable management apart from the owner. Rudolfo’s buyer (again, like most) did not have its own management team to insert into the business. Rudolfo had not attracted or retained solid management (nor had he created a plan to do so).
  2. Strong and increasing cash flow. Unfortunately, Rudolfo’s company had been experiencing declining cash flow.
  3. Sustainable and comprehensive systems throughout the organization (from human resources to marketing andsales to work flow). At best, Rudolfo’s business was a hodgepodge of stand-alone, as-needed systems created over timeto respond to particular emergencies, and positioned Rudolfo at all decision points.
  4. A plan to grow the business – focused on enhancing a company’s unique position in the marketplace. Rudolfo hadnever created a written plan, let alone identified or clarified his company’s competitive advantage.

When Rudolfo failed to satisfy the buyer’s concerns about his company’s Value Drivers, he understood that his company’s value, management systems and growth all depended on his active and continued presence in the business.

While Rudolfo had naively steeled himself for a lowball offer, the buyer instead disappeared. In today’s financial and economic climate if a buyer is willing to acquire a company that isn’t a turnkey operation, it will not do so without the owner’s continued involvement. Buyers do not have the time, the risk tolerance or the in-house talent to correct deficiencies.

While too many owners of outwardly successful companies share Rudolfo’s fate, the heart of the problem lies in their failure / inability to do anything about it.

How long will it take you to avoid Rudolfo’s fate and prepare for the sale of your company for top dollar? We don’t know. But we do know that it’s a lot easier to bury your head and go about working in the business than it is to devote the time, energy, and resources to prepare for your exit.

If you spend your time waiting passively for improvement in the M&A market or for a rising economic tide to lift your boat, those events may occur. But if they do and you have not actively used your time to make your company attractive to buyers (by installing value drivers) your business will still not likely sell, and if it does, it will not sell at a premium compared to other companies in your sector. Creating value drivers takes time; time buyers are not willing to take.

For Rudolfo and for most owners, it takes at least five (and often as many as ten) years to execute an exit plan to make a business saleable. Factors that lengthen the exit planning process include:

  • Unforeseen threats posed by downturns in the economy, your health or in the composition of your management team;
  • An owner’s overly optimistic assessment of how rapidly the company and its employees can adapt and embrace change.
  • The likelihood that you are more motivated than either your advisors or your employees to work toward your successful exit.
  • The probability that everyday business crises will divert your focus from long-range planning.
    Given that it takes time not only to create the plan but also to implement and to achieve measurable results, is it not time for you to start planning the most important financial event of your life—your exit from your company?

The examples provided are hypothetical and for illustrative purposes only and do not represent actual client experiences. Subsequent issues of The Exit Planning Review™ provide balanced and advertising-free information about all aspects of exit planning. We have newsletter articles and detailed white papers related to this and other exit planning topics.

The Exit Planning Review™ is published by Business Enterprise Institute, Inc.
Valuing a Business: How Much is a Business Worth? Wed, 23 Jun 2021 18:21:51 +0000

How many times have you heard a business owner say, “I’ll sell this darned thing to the next person who walks in the door”?   Just as often, you have probably heard a prospective buyer say, “If only I could find the right business, I would buy it in a minute.”   Best estimates indicate 2.5 million small businesses change hands annually, meaning that one in every fifty Americans either buy or sell a business each year.   Although quite minor in comparison to real estate or security transactions, sales of businesses represent an important and ever-increasing element of today’s economy.

I am always amazed when I hear energetic and creative people reject investments in small businesses based on excuses like: “no good opportunities exist” or “I have no training in that field.”   More truthful reasons would be “too much risk perceived” or “a small” business is too unstructured for my comfort level”  or “I don’t really understand how to value or buy one.”    This article will address the complex and confusing world in which entrepreneurs buy and sell their companies.   The imperfect nature of business valuation will be discussed along with the illiquid secondary markets in which small business sales must find a home.   Please keep in mind the valuation portion of this field is more of an art than a science.   Further, keep in mind that your author is a “working stiff” earning a living selling businesses rather than writing about marketing techniques.

Understanding Buyer and Seller Motivations

Sellers never really seriously consider selling when everything is going great.    Buyers never buy unless they are convinced they can out-perform a previous owner.    The true reason for selling must be the first piece of information obtained by the prospective buyer.   Likewise, sellers can obtain top value and favorable terms if they fully understand a buyer’s needs, abilities, and sincerity level.

Obtain Credible Financial Information

You don’t go hunting without a gun, and likewise shouldn’t seriously consider buying a business without first obtaining credible financial statements.   Tax returns will always supply minimum gross sales and net income, but suffer from the same defects as any other financial statements prepared “in-house” when it comes to co-mingling of personal expenses.   These vital documents need to be adjusted (normalized, as it is known in the industry) to reflect results if the business had been independently managed.   Income statements must frequently be adjusted because of a failure to totally report sales, excess perks, salaries to self and the amount of assets and working capital needed to operate the business.   As we will see later, a restatement of the balance sheet to reflect current fair market asset values is also an important adjustment in most sales of small businesses.

Analysis of Financial Information and Trends

A buyer is primarily interested in future profits.   But an analysis of historical trends is the starting point for forecasting the future.   Observing trends and obtaining specific reasons for extraordinary results is the most important element here.   A proforma income statement using your new debt service and operating costs and the former owner’s gross sales and margins generally gives the best results.   Don’t forget to include additional working capital for the cash usually taken out of the company by the departing seller.   Since most businesses do not show a stunning financial history, don’t throw in the towel at this point if you are still bullish on the company’s future due to qualitative reasons.

Qualitative Analysis

Most business owners have misconceptions of their real value to the company.   You must find out if the owner can be replaced without a substantial loss in business.   Sometimes, a change in ownership will bring back lost customers, but there are times when the current clientele has a special relationship with the current owner and they will disappear when ownership changes.   In addition to in-depth and frank discussions with the owner, a buyer should interview the companys key personnel, suppliers, competitors, accountants and bankers.   If such interviews are not possible, in-depth industry research or reliance upon the analysis of a broker is important.

Special attention should be given to understanding the unique market niche this company possesses.   You must be convinced this advantage will continue after the transition to new owners.   It is important to find out who really does the work in the company.   How are the assets being used?   How much can sales be increased with more intensive use of existing assets and personnel?   Have your attorney review the company’s supplier and sales contracts, and all leases and loan covenants.

Determining the Actual Value

Now the tricky part begins.   In its simplest form, there are only two ways to value a business.   One involves “capitalizing” the net income stream the business is expected to generate.   That involves expressing in terms of one lump sum how much that income stream is worth.   The other requires that you assign a dollar value to the company’s assets.   The only universally accepted method of valuing a business is outlined in Revenue Ruling 59-60 of the Internal Revenue Code.   Unfortunately, this guideline is very broad and vague and applies only to corporations which constitute less than five percent of all businesses sold.   The best business appraisals use several valuation methods and then compare the results using common sense to decide which of the methods ought to be given more weight in the particular situation.

A popular valuation concept is known as the “Excess Earnings Method.”   This type of valuation gives weight to both the company’s earning potential and its asset base.   Intangible or goodwill value (over and above the value of the actual assets) is allowed, but only if the goodwill component is deserved due to profits in excess of reasonable returns.

Excess Earnings Valuation Example

Step 1: Determine average stabilized pre tax earnings of company for the past three years. $80,000
Step 2: Determine average fair market value of assets used in the business for the same three-year period. $500,000
Step 3: Apply a fair rate of return, say 10% on the assets computed in Step 2 (10% x $500,000). $50,000
Step 4: Subtract Step 3 from Step 1. This equals excess earnings attributable to goodwill. $30,000
Step 5: Capitalize the excess earnings in Step 4 at a selected rate, say 50%, to yield the value of goodwill (2 x $30,000). $60,000
Step 6: Add tangible assets of the company (Step 2) to the capitalized goodwill value (Step 5). This sum equals fair market value. $560,000

Goodwill is not a reward for funding losses or start-up costs.   It is not a payoff, at the expense of the new owner, for long hours at low salary, or a company without debt, or one with fully depreciated assets.   A legitimate mistake most sellers make is thinking they should be rewarded for profitably running a business which has not paid them a fair salary or a return on investment of the company’s assets.   Payment to you and adequate return on your years of invested capital must occur before you can fairly say the company is a real winner that deserves an excess goodwill payment.

When it comes to turning that expected stream of net income into one lump-sum value, an important decision you face is choosing the correct capitalization rate.   That is, choosing the correct rate of return you need to receive on your investment.   Most buyers and sellers make value decisions based on emotional reasons rather than sound financial analysis.   If that expected income stream has a lot of risk associated with it you must increase the required rate of return.   That’s why low-grade bonds pay higher interest rates because in buying them you are facing a risk that the bond issuer will default.   For example, if you are buying a company whose only assets are U.S. Government Treasury Bills, you could capitalize its net income at seven percent (or conversely multiply net earnings by 14.3 times) to arrive at a value you would pay for that company.   If the company’s sole assets and returns were based on holding New York Stock Exchange stocks, that capitalization rate would be 15% (a multiple of 6-2/3 times earnings to be used), which reflects the approximate long-term New York Stock Exchange return.   Such returns are higher on average, but far riskier in the individual case.

Venture capitalists look for returns from 25% to over 50% annually on passive investments in start-up companies.   This wide risk/return range supports the finding of more knowledgeable brokers and business appraisers that a capitalization rate of between 20% and 40% (earnings multiple of 2-1/2 to 5) is appropriate in valuations based purely on capitalizing earnings.   Use of the “Excess Earnings” method requires an even higher capitalization rate since the majority of that method’s valuation comes from the asset base and the goodwill is intended to be only the “icing” on the cake.

No valuation is complete until you stand back from it, apply your common sense, and determine if the result is realistic.

Preparing the Company for Sale

The fact that businesses are hard to sell and qualified buyers hard to find artificially reduces the fair price buyers should receive for a business.   Likewise, buyers tend to shy away from a purchase if the payback period extends over seven years or if the down payment is prohibitive.   This leads up to the all-important concept:   Price Does Not Equal Value.   You won’t get full value for your company unless you market it properly.   As we found out during the recent stock market crash, every investment must be sold at the right time to realize the best return.   A small business is no different.   Unfortunately, most small business owners do not time the sale of their businesses very well.   Since 95% of all businesses are sold for reasons outside the control of the owner, it is not surprising that most owners are ill-prepared for the transfer.

Most businesses terminate due to financial insolvency.   A sale of an insolvent business is improbable because there is nothing of value to sell that will generate ongoing income.   Divorce, partnership dissolution, and inability to continue due to health or age account for the balance of small business transfers.   In my experience, few businesses sell because their owner desires to “strike it rich” by selling at the right time.

You would think successful entrepreneurs would be better prepared to face the inevitable sale of their small business, yet that is not the case.   People do not plan for a transition because they feel it is too remote or because “business is too good to think about selling.”   The more successful a business has been, the more difficult it is for the owner to conceptualize himself or herself away from the business.

The highest value will be realized for a company if a logical and well-supported plan for its sale is formalized.   First realize that there is no substitute for accurate record keeping in the years just prior to a sale.   The less footnoting and explanation you or your broker need to make to a new purchaser, the better your chances of creating a “believable” scenario about the future success of the business.   Don’t expect a buyer to treat you fairly and with compassion if you have not treated the government fairly with tax payments or if you have suspect dealings with your customers or suppliers.

Remember that a purchaser is not buying your past profit history.   Your established system and unique market niche is what the buyer really wants.   The best method of selling a business is to show a new buyer how he or she can pay for the purchase out of the first five years of company cash flow.

Keeping the Sale Confidential: The Big Myth

Like excess touching of a flower arrangement by curiosity seekers, too much exposure will certainly damage the flower of a small business.   On the other hand, good exposure to the light of day, a healthy pruning and a strong dose of fertilizer could be just what your small business needs to make the public aware of it.

Sellers are genuinely concerned about damaging their business by letting the public know it is on the market.   In my experience, most damage is not caused by the business being for sale (everything is for sale if the price is right), but rather by the seller’s obvious loss of interest in the well-being of the company.   Rare is the individual who can continue full steam ahead with business while at the same time forging into the totally new area of selling that business.   The time commitment, frustration, confusion and personal rejection associated with the negotiation process will damage day-to-day operations.   If you are going to sell it yourself, I suggest you plan properly by notifying key personnel, customers, suppliers, and your accountant.   Rumors of businesses for sale circulate wildly, so use that medium in a manner most advantageous to you.

Sellers of businesses are at an extreme disadvantage versus buyers.   Buyers always fit into two classifications:   (1) Someone looking to buy a job, or (2) sophisticated investment purchasers.   It is not uncommon for a buyer to look at ten different companies before buying one.   As a seller, on the other hand, you sell a business once in a lifetime.   You might know your business, but you probably aren’t current on the negotiation and marketing process for the sale of that business.   Since buyers desire to pay the minimum for your company, the only chance you have to obtain a premium price is to package your business well.   Your ability to project a positive future image will be bolstered by outside professional advisors.

The Closing

Some closings are so complex the participants don’t realize they are over until the legal bills arrive.   Others are simply concluded by a handshake and an exchange of the front door keys.   A good attorney will protect you as necessary yet not lose sight of your bargaining position in the transaction.   The attorney’s major role will be to insure that you (the buyer) receive a clear title and are adequately secured in any note which will be carried back.   Assets and liabilities to be included in the sale, warranties, collateral, future relationships, default procedures and other standard items will need attention.   Legal problems often occur in that gray area between oral acceptance and final contract signatures.   As Texaco, Inc. found out in its litigation with Penzoil, the pop of a champagne cork can manifest enough intent to bind the parties by oral agreement for the sale of a major company.   Be cautious in your preliminary negotiations and seek counsel prior to final closing.

It’s Not Over ‘Til It’s Over

Unless you are one of the 25% of business sellers who are fully cashed out, you will need to carry some form of indebtedness on the company you have sold.   Horror stories abound about retirees called from the golf course to run devastated companies they formerly owned.   Most of these tales are exaggerated and could be prevented by better structuring of the sale.   If you sell a business for an exorbitant price and too little down, you probably will get it back because the debt load will be too much for the new owner to bear.   The best transactions have a reasonable enough down payment to ensure a commitment level by the buyer, a secured note to create an annuity for the seller, and a variable earnout to reward both buyer and seller for a smooth transition of the business.   Unrealistic expectations over terms kill more deals than price negotiations.


There are no absolutely right answers or strict rules in the world of business sales.   There are only good methods and techniques which will answer the key questions about the future success of that company.   Sellers should not deceive themselves about their company’s real value and should be realistic about the pressure they are receiving to sell.   The seller should understand that there is a small number of potential buyers who are financially and professionally qualified to run their business.

The best transactions are structured in a way which gives immediate cash flow and long term financial reward.   A good transaction will create a tax-favored retirement annuity for a seller along with the personal satisfaction of knowing the business will continue with competent management.   If done right, the process of changing ownership of a small business can be satisfying and a “win/win” situation for both buyer and seller.