HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS “PREPARING YOUR BUSINESS FOR SALE – PART IV (B)”
By Ralph Fain

Ralph Fain is a principal in the brokerage firm, R/Fain Group. Mr. Fain also has over 20 years of broad business experience with Fortune 500 companies. R/ Fain Group is a professional business brokerage firm which confidentially represents the interests of various sellers and buyers. Each week Mr. Fain will give tips on Business Brokering, and how to sell your business.

Last week we discussed the importance of the physical appearance of your business and the positive (or negative) impact it can have on a buyer’s psyche and perspective and, consequently, the significance it has relative to the sales price of a company. This week we will review other factors (non-physical appearance factors) which also impact the attractiveness of a business.

These can take many forms (tangible, intangible, operational, financial) and, with the exception of the financial area (which is to be the topic of a future article) several of these factors are discussed below. Just as physical appearance counts, any attributes of your business which make it unique (in a positive sense) enhance the attractiveness of your company to potential buyers and, hence, can have a beneficial boost to your asking price. Consider the following:

• Business history – if your company has been in business for 10+ years (and your competitors average 5 years), highlight it in talks with buyers as this could lead to a premium being placed on your business.

• Has your company recently invested in upgrading computer systems and/or operational practices which make your company more productive, more efficient and more profitable? If these favorable results are reflected only in this year’s current financials (and not in your historical financial data), adjustments to your historical cash flows are in order (for purposes of valuation). This can have a substantial impact on your asking price and should be stressed to buyers.

• Proprietary product/service – does you business have a proprietary product or service? If so, this too should be emphasized.

• Are there barriers to entering your type of business/industry (such as educational, licensing, capital, etc requirements)? If so, this is also a positive for your company as, presumably, there is lessened competition as a result.

• Can your product or service be easily replicated or duplicated? If not, this is also a point in your company’s favor and should be stressed in discussions with buyers.

• Have you revised/updated marketing materials/media such as your company’s web site? Is this a web site name which continually appears in the top 10 on specific word/phrase Internet searches (i.e., related to your product or service)? If so, this adds value.

• Business reputation – if you know your company has an outstanding reputation, ask buyers to verify this fact. If your client retention rate and client tenure is greater than your competitors and/or the industry average, be sure to trumpet it to buyers. There is value here!

• Have you, as owner, relinquished and delegated much of the day to day operational decision making to qualified employees (i.e., is there an organizational/management structure in place?)? If yes, point it out. Remember, too much reliance on the business owner is not a good thing; it is much better to have systems/procedures/policies/people in place to handle the day to day.

• Further to the immediately above point, build an effective management team – again, one which minimizes reliance on the owner. This will build the buyer’s confidence in the company’s capability to operate independent of the owner – again, a good thing!

• Have you negotiated a long term lease (with options) with terms favorable to your business? Have you negotiated favorable vendor or client contracts the monetary effects of which are not included in your historical financial data? Are your contracts with vendors, customers, etc assignable? All these are positives for your company so be sure to stress these to buyers.

And the list goes on and on. How your business is viewed by buyers is both a function of your company’s financial strength and also a function of the opinion/valuation the buyer has of your company. Believe it - how your business is viewed by the buyer is an extremely critical component of your company’s value. The physical appearance, the intangibles, and the unique factors of your business have a substantial impact on the valuation of your company from the perspective of a qualified buyer.

The point is – emphasize what makes your company unique and what differentiates you (i.e., makes your business better) than the buyer’s other investment options. Stress your strengths!

As always, see you next week in this space where we will continue our discussions regarding “Preparing Your Business for Sale”. Should you have any questions or require additional information about the above or about buying and selling businesses in general, please feel free to contact the R/Fain Group at 832-646-0832 or via our web site.