HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS: “Other Factors to Consider When Selling” – Part I
By Ralph Fain

Ralph Fain is a principal in the R/ Fain Group, a professional business brokerage firm which confidentially represents the interests of sellers/ buyers of “Mainstreet to Mid Market” companies (revenues from $1MM to $25MM). Mr. Fain has over 20 years of broad business experience with Fortune 500 companies as well as with small/medium sized companies and has served in various capacities including Controller, Vice President, and President/CEO. Each week he will provide comprehensive information on the many aspects of buying/selling businesses.

In our most recent articles we discussed the two principal ways in which businesses can be sold – via asset sale or via stock sale. In those articles, we reviewed the pros and cons of each type of transaction from a seller’s perspective. The gist of the articles was to structure the sale in a manner in which the maximum amount of cash (after tax) is to accrue to the seller of the business/company.

In addition to the determination of the type of structure (i.e., asset or stock sale), there are other factors or considerations which directly or indirectly impact the amount of money to be received ultimately upon the sale of a business and which impact the probability of a successful sale. Several of these factors are as follows:
- Valuation/appraisal of the Company
- Resolution of litigation, pending issues, unresolved liabilities, etc
- Amount of down payment by buyer
- Owner/seller financing
- Security liens/Personal guarantees by buyer
- Other requirements/considerations

In several prior articles we discussed the importance of business valuations and the basics of the valuation calculations (ref HBR archives for Sept, Oct, Nov and Dec 05 articles “Valuation – What’s My Business Worth” and “Earnings and Multiples”. Suffice it to say that, at a minimum, having a general idea as to the value of the business and its assets is critical and having a specific professional valuation/asset appraisal will ensure a maximum sales price to the owner/seller.
As you, the seller, want the process to go as smoothly as possible (with no last minute problems or complications), it is incumbent upon you to ensure that all issues such as unsettled litigation, potential liabilities, pending issues, etc are resolved as quickly and as early as possible. In addition to the requirement to disclose the existence of the above (if still unresolved or if possibly impacting the business in the future), it is in everyone’s best interest to have no (or as few as possible) unsettled issues. Considerations such as lease extensions/options, disputed accounts receivable or payable, franchise (or sales, income, payroll or any type of) tax, etc should be taken care of prior to the selling process. These types of issues only create doubt in the mind of a buyer and remember: doubt = uncertainty = perceived increased risk = lower sales price (or no sale).
Another factor to consider when selling your company is the amount of down payment to be required of the buyer. Many lenders like to see a down payment of between 20 – 30% of the purchase price and generally frown upon a buyer who can put down 10% or less of the purchase price. Generally speaking, the higher the down payment by the buyer, the better is the indication of the financial strength of the prospective purchaser. The contrary axiom to this, however, is that the higher the down payment requirement, the fewer buyers there are who may qualify as purchasers of the business. As in many things, a balance is necessary to ensure that the seller is protected regarding the receipt of all monies due him (i.e., dealing with only credible buyers) and that the down payment requirement is reasonable so as to attract as many qualified prospects as possible while weeding out the unqualified buyers at the same time.
Part II of “Other Factors to Consider When Selling” will be forthcoming as our next article in the series. In that article, we will be discussing seller financing (and other deferred payment plans) and what a seller can do to optimize the” saleability” of his business and what can be done to mitigate the risk of seller financing.
As always, see you next time in this same space for our next article – the pros and cons of buying a business via an “asset” sale. As always, should you have any questions or require additional information please feel free to contact the R/ Fain Group at 832-646-0832 or via our web site.