Selling Price Defined
When the time comes to sell a business, just what makes up the selling price? What is it that the seller is selling and the buyer is buying? It is important that the selling price be defined in such a way as to avoid any confusion.
Below you will find some sample wording used by business intermediaries to define the selling price. Keep in mind that this is sample wording only and is presented here merely for informational purposes.
The term "selling price" shall include:
the selling price of the assets acquired plus any obligations assumed by the purchaser,
if the sale becomes one of stock, then the selling price will be all of the assets plus all of the liabilities of the corporation plus the value of any covenants not to compete, employment and/or consulting agreements plus the value of any allocations for goodwill and/or intangible assets.
The total sale price shall consist of all consideration received by the owner and/or the company including the sum of the following:
The total amount of cash received by the company and/or owner in connection with the sale, lease, or other transfer of the company, or any interest therein. Such cash consideration shall include but not be limited to purchase price, lease consideration, non-competition payments, consulting payments, license fees, royalties, retained cash, and other consideration received at or subsequent to the consummation of the sale transaction.
All future, contingent or undetermined amounts in whole, such as an "earnout." The commission shall be based on the actual amount of such future or contingent payments as and when they are received.
The current fair market value of all non-cash items such as securities, notes or other property.
Any amounts retained by the company for ultimate distribution to the owner, including any salaries, bonuses, deferred compensation, liquidation proceeds, or other amounts (in excess of the owner's historic salary) received, retained or withdrawn by or for the benefit of the owner (including profits generated prior to closing) from and after the date of execution of this Listing Contract.
The amount of any liabilities assumed by a purchaser (except for unsecured liabilities shown on the company's financial statement or unsecured liabilities which arise hereafter in the ordinary course of the company's business; i.e., any secured debt assumed by a purchaser shall be part of the sale price.)
Time is of the Essence
After all parties have agreed upon price and terms, it is important to quickly proceed toward closing.
Have you watched Olympic competitors when the start to their event gets delayed? They seldom do well. The nervous energy they are trained to channel into the competition begins to build beyond its bounds. Doubts, fears and anxiety creep in during the unexpected delay.
Delaying a closing can have a similar effect. The buyer is ready, focused on the event of new business ownership, but as the wait to begin drags on, the nervous energy can turn into doubts, fears and anxiety. Even sellers can begin to have increased anxiety over what they will do once their business sells.
A business broker can help keep the momentum moving toward closing, but buyers, sellers and other parties involved in the closing process must also proceed with a mindset that "time is of the essence."
Are You Getting Ready to Sell?
The most important question to ask yourself at the very beginning of the selling process is: Are you really serious about selling now? The next step is to tell your employees why there may be strangers entering the business and even looking around. You might explain that you are considering selling and promise them a bonus if and when it sells. If it is true, you could explain that you have put such a high price on the business that it is doubtful that anyone will actually buy it; or that if some big publicly-held company wants to pay a fortune for it, you'll listen. Obviously, the majority of business owners don't want their employees to know that they are considering selling the business. They insist on complete confidentiality; however, this is a "Catch-22." In order to get the highest possible price, potential buyers have to be contacted. And, if buyers are interested, they will want to visit the business. Work this issue out ahead of time.
A seller will also want to create a place, perhaps in a home office, or a separate file drawer, in which to gather all of the necessary documentation that a prospective buyer will want to see from the very beginning all the way through the due diligence process. This should include, but certainly not be limited to, legal documents, contracts, leases, financial statements and tax returns for three years, intellectual property such as patents, copyrights, etc. A seller should have all of this set aside prior to going to market, possibly kept together and organized in a 3-ring binder or in appropriate files.
Finally, retain the services of a business broker so you have someone representing you and channeling information between you and the buyer. This reduces the potential of a confidentiality breach. Just as importantly, a broker can guide you through the selling process maze. However, their biggest value is that they know how to properly market the business to obtain the highest selling price possible. They are, indeed, a high value added.
Evaluating The Potential Of a Business
Considering buying a business? While you want to evaluate the current profitability of a business, you should also look for areas where you could increase the profits -- areas of potential growth. Here are some areas to look at that can fairly quickly increase profits.
· PRICING: Are the prices of the products or services set too low? Owners too often continue with the same prices year after year without revisiting their pricing structure.
· CUSTOMER SERVICE: Elevate the quality or amount of customer service. Do you see areas for improvement? Better customer service may not only increase business and support the higher prices suggested above, but also encourage customers to pay more promptly, increasing cash flow.
· EXPENSES: Review what is currently paid for inventory, supplies, utilities, insurance, technology and any other expenses. Is the owner getting the lowest price possible?
· INVENTORY: In some cases, inventory levels may be higher than necessary. Retail operations want their stores to look "busy," but they don't need a basement or warehouse full of inventory. In today's fast-moving economy, inventory can be supplied almost on demand - in most cases. This should be balanced by still taking advantage of special pricing on certain items or stockpiling hard-to-get inventory.
· OUTSOURCING: Some services, especially in today's environment of the self-employed, can be outsourced. While replacing workers is not pleasant, and should only be done if substantial savings can be realized, outsourcing is often worth investigating.
These are just a few areas to consider evaluating for potential increased profits. A business broker can provide further assistance in helping you evaluate hidden potential in businesses for sale.