There are several things to consider when buying or selling a business. The most important is to listen to the other side. There are always reasons why someone wants something – even if you don’t agree at first. Find out where the other side is coming from, then make a decision on whether you can live with it or not.

Next, whether you are the buyer or the seller, you can not have everything your way. You can’t win on every point or issue. Be prepared to give in on those areas that are not as important as those you feel most strongly about. If you are a seller, you may not be able to get a real high price and a real high down payment. You will have to decide which is more important. The same is true for the buyer. You can’t have it both ways.

Always enter the purchase or sale of a business with a spirit of cooperation rather than one of confrontation. The buyer or the seller, as the case may be, is not the enemy. If the seller wasn’t interested in selling, the business would not be for sale. If the buyer did not like the business there would be no negotiation or eventual sale.

The secret of a successful negotiation is laying out all the points on the table for discussion. It is key to understand where everyone is coming from and to understand what is and what is not important to each party. When there is a sense of cooperation among all of the players, a successful deal will usually result.

The following are situations where the price was not the deciding issue in the successful sell of a business. The ultimate buyer may be the only one who really understands the situation. A business intermediary really understands the issues and can lead the buyer and seller to a successful resolution.

• One seller had 60 shareholders who needed to walk away from the deal.  The losing buyer wanted all selling shareholders to be accountable for the “reps and warranties.”  The winning buyer waived the reps and warranties at closing.

• A seller’s management team wanted some future upside in the deal.  The losing buyer offered all cash and normal compensation.  The winning buyer offered 80% cash, 20% stock plus 3-year earnout on revenues — including acquisitions.

• Time was of the essence.  The losing buyer needed 30 day due diligence and negotiations plus a 60-day window to close the deal.  The winning buyer offered to close within 40 days of the Letter of Intent and agreed to have limited due diligence.

A January 2004 survey conducted by the DAK Group/Rutgers found the following breakdown of why businesses are for sale:

Reasons To Sell

• Risk reduction      44%
• Competition or market changes   41%
• External pressures     27%
• Lifestyle factors (age, health, etc.)   14%
• Lack of capital      9%
• Ownership/management issues  07%

Note: Multiple responses allowed;  Source: DAK Group/Rutgers

It is interesting to note that the top, by far, three reasons to sell are financial as is the fifth reason. The information furnished by much of the media suggests that the big reason to sell is generational – in other words, all of yesterday’s owners are now ready to retire.  According to the survey above, that motivation (included in “Lifestyle factors”) represents only 14 percent, and it  includes health and other personal issues.  The last reason, at 7 percent, might also include retirement since ownership/management could be involved with retirement issues.  Twenty-one percent of the respondents mentioned either lifestyle or ownership/management issues.  Placing these reasons at the top of the list does not justify the hype of the “baby-boomers” retiring over the next few years.

Shown, below, the reasons for considering an acquisition seem to be more obvious.  Although growth leads the list by a hefty margin, all of the other reasons could also be considered growth issues.

Reasons for Considering an Acquisition

• Growth   72%
• Acquire competitor  38%
• Product diversification 37%
• Geographic diversification 29%
• Technology   09%

Note: Multiple responses allowed;   Source: DAK Group/Rutger

The reasons for selling a business can be divided into two main categories. The first is a sale that is planned almost from the beginning or by an owner who knows that selling is or should be a planned event.  The second is exactly the opposite – unplanned; the sale is motivated by a specific event such as health, divorce, business crises, etc. However, in between the two major reasons, are a host of unpredictable ones.

A seller may not even be thinking of selling when he or she is approached by an individual, group or another company, and an attractive offer is made. The owner of a business may die, and the heirs have no interest in operating it. A company may bring in new management who decides to sell off a division or two; or maybe even decides that selling the entire business is in the best interests of everyone.

A major competitor may enter the market, forcing an owner to elect to sell. And the competition may not just be another company. The owner of a business may realize that an external threat is such that the company will lose a competitive advantage. New technology by a competitor may outdate the way a company produces its products. Two competitors may merge, placing new pressures on a company. The growth of franchising and big box stores can promote themselves on a much larger scale than a single business, no matter how good it is. National advertising can create the perception that a large business’s pricing, inventory or service is better than the smaller competitor, even if it isn’t.

Although these issues may not push a business owner or company management to consider selling, they are certainly causes for consideration. Unfortunately, most sellers fail to create an exit strategy until they are forced to. Professional athletes want to go out on top of their game, and business owners should do the same.

Use the following criteria to separate the serious buyers from window-shoppers. (Add up plus points, subtract minus points. The serious buyer will rate a 6 or above.)

Minus Point Factors

• -4 needs outside financing (excluding home equity)
• -4 been looking for 6 months or more
• -3 no available cash
• -3 still working in corporate world
• -2 spouse not supportive of buying a business
• -2 uses a legal pad or clipboard and takes too many notes
• -2 feels leisurely about finding the \”just-right\” business
• -1 now renting (although has lived in area for some time)
• -1 under 25 or over 62

Plus Point Factors

• +3 does not have a job or has just resigned
• +3 understands that books and records are not the only indicators of value
• +2 has enough money to buy a business
• +2 no dependents
• +2 family member or close relative has been a business owner
• +2 willing to take the time to look without a lot of notice
• +1 location is not a prime consideration
• +1 age 25 to 62
• +1 skilled worker or professional

If you are even thinking about selling your business, it’s important to know the questions that buyers generally want answers to. For example, the first question almost always asked by buyers is: If this is such a good business why is it for sale? How you answer this question can make or break a sale. A vague answer can discourage buyers from further consideration of your business, as they may assume the worst.

If you say you are “burned out’ or just ready to try something new – that’s fine. If you’ve owned and operated the business for 10 to 15 years, buyers will most likely accept your reason for sale and continue their investigation. However, if you’ve only owned and operated the business for two years or less, a prospective buyer may find it concerning that you are already burned out or ready for something new.

If you’re sick, be open about what the problem is; otherwise buyers will think you are just sick of the business. The worst thing a seller can do is to fudge an answer or not provide a completely honest answer. Buyers will, most likely, see right through the given reason for sale and walk away. So, even if you really are tired of or just plain hate running your own business, be up front and explain why. Honesty is always the best policy.

It is also a good policy to engage the services of a professional business broker. Brokers have been through many transactions and can help a prospective seller deal with the reason for sale as well as the other questions a buyer may have. Here is a brief list of other questions buyers often ask and business brokers deal with all of the time:

•    Why should I buy an existing business rather than start one myself?
•    How are businesses priced?
•    What should I look for?
•    What does it take to be successful?
•    What happens if I find a business I want to buy?
•    Do I need outside advisors?

In addition, buyers often want answers to some more specific questions such as:

•    How long has the business been in business?
•    How long has the present owner owned the business
•    How much money is the business making?
•    Are the books and records readily available?
•    Will the new owner help me learn the business?

These and many other questions are ones that business brokers deal with every day, equipping them to help you prepare honest and useful answers.

Buyers are expected to perform a thorough due diligence on both the business and the seller(s). However, many sellers don’t do an extensive due diligence on the buyer(s). Deals do not always close; many are aborted in the very early stages, and others tank somewhere along the way to what was hoped to be a successful closing. So, what happens that prevents a deal from closing, especially one that began with such positive signs? Obviously, in many cases, the buyer’s due diligence turns up some items that were not revealed by the seller, and others that can’t be resolved.  Some of these items probably had early-sign red flags; other red flags occurred somewhere along the way, and unfortunately, the result was that there were pre-closing red flags.

The Early-Sign Red Flags

Sellers should seriously look at who the buyer is. This may be a corporate buyer who is just looking. On the other hand, some sellers may overlook a strong individual buyer for fear that he or she may be inexperienced in the acquisition process or might be too cautious. In both cases, the seller may want to ask questions such as the following: What companies have you already looked at? How much equity are you willing to commit? What experience do you have in what my firm does?

Some sellers have that sixth sense that allows them to size up a prospective buyer. No one wants to waste time with someone who really isn’t a buyer. The deeper a seller goes into the due diligence process with a potential buyer, the more red flags may appear. If there are too many, if the ones that get raised seem too difficult to resolve, or even if they might be resolved, if that sixth sense says “no” anyway, it is probably time to move on.

Red Flags Along the Way

Once the Offering Memorandum has been given to the potential buyer, the next stage of red flags may occur. For example, if your intermediary informs you that he or she has not heard from the prospect after receiving the memorandum, it could mean that the buyer prospect is not as interested as you might have thought. Also, if the next step involves a junior member of the prospective buyer’s management rather than the CEO or COO, the red flag should go up. If the prospect, corporate or individual, refuses to provide, or delays providing, information showing their financial capability to do the deal, the red flag should be raised. One recommendation is to set up a social event, a dinner or extended lunch between you and the buyer prospect. Visiting at a social event allows the buyer and seller to get to know each other, establish a cultural understanding and build a working relationship. If this meeting goes badly, the red flag should go up, at least half-way.

Red Flags Just Prior to Closing

The Letter of Intent has been drafted and signed. One area that may cause several red flags to go up is if the buyer’s attorney is inexperienced in the deal process, is overly aggressive, or just won’t bend. This is such an important issue that if changes aren’t made, the deal is probably in serious jeopardy of collapsing.  The seller’s attorney may be able to gather some insight on this matter.

Both sides are taking some risks in any buy-sell process, but both sides should take their due diligence efforts seriously. If a deal has arrived at “a just prior to closing” status, it is certainly vital that both sides can resolve their red flag issues. It could be tragic if the deal has gone this far without serious red flags being raised.

The whole purpose of recognizing the red flags is to try to resolve them before the deal “craters”. A positive attitude by both sides is almost always the answer, and this attitude is best accomplished by the use of a professional intermediary who has been there, knows the red flags, and knows how to resolve them.

The question most often asked by those considering placing their businesses for sale is: “What is my business worth?” The question that should be asked is: “How much can I get for my business?” Worth and value are words that in many cases are interchangeable. Leading business appraiser Shannon Pratt, in his book Business Valuation Body of Knowledge, states that “Price is the face value at which a specific transaction occurred. It may have been arrived at arbitrarily, by negotiation, by contract, by court order, or by some other means. It may or may not comport to any definition of value discussed herein.”

“Fair Market Value” is a term that sounds tailor-made for a business owner who wants to know what his or her business might sell for. The U.S.Treasury Department offers this definition of Fair Market Value: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This might work in theory, but not in the real world. The word “negotiation” is not used, so arriving at this Fair Market Value is assumed to just happen. The sale of a business simply doesn’t work that way.

The price that a business may sell for is generally far removed from its value. Value tends to be an exact price for a specific date and must be able to be defended by the appraiser. There are many different types of value, based on the purpose of the valuation and/or the reason behind the decision to sell: divorce, insurance purposes, bank loan, partnership issues, buy-sell agreements, tax concerns, ESOPs – the list is lengthy. In many cases, each reason may result in a different valuation.

When a seller asks what he or she might receive for their business, there is no right answer.  It depends, for one thing, how badly the seller wants to sell.  Regardless of who places a price on the business, it will be the marketplace that ultimately determines the price. The seller may not agree with this, but he or she will have to accept it or face the fact that the business most likely will not sell, regardless of asking price or perceived value. It all boils down to a buyer’s perceived value of the business.

Professional business brokers know the marketplace, what businesses are selling for, what buyers are really looking for, why they may be buying, and most importantly how to deal with perception of value.