The Facts of Business Life (36 page)

However, even though the business itself has become your product at this point, your marketing mind-set shouldn't be all that different than it's been all along. Since the marketing process is essentially the same, you have to keep doing exactly what you've always done. That is, you have to research the market, price the product, identify your target audience, create value in the product, attract promising buyers, and sell it. The fact that it's your business you are selling can be daunting, but if you've gotten to this point you already know how to sell a product successfully, and there's no reason for you to stop doing it now.

Of course, a business is a different kind of product, so you have to package it differently.

That means you have to decide exactly what it is that's for sale, the terms of selling (such as selling your assets and goodwill but leasing the facility), the preferred time frame for the sale, how much time you'll give prospective buyers to decide if they are interested, and what kind of assurances you are willing to offer potential buyers. In other words, just as with any other product, you have to demonstrate how it works, why it will continue to work, list the ingredients (in this case the assets), and wrap it up in an attention-getting package in order to maximize your business's value and attract the best buyers.

The Benefits of Marketing Research at Level 5

• Marketing research provides you with the information you need to identify your best buyers and the value of businesses like yours.
  
• Marketing research enables you to determine the competitive environment in terms of supply and demand, the number of buyers vs. sellers, and other factors.
  
• Marketing research helps you determine how to present your company's operations and facilities in the way that will be most appealing to potential buyers.
  
• Marketing research enables you to recognize a problem or an opportunity that may not have been apparent before and to take action on it.
  
• Marketing research helps you determine which buyers will be able to pay the most and which can benefit the most from buying what you have.
  
• Marketing research enables you to find past sales of businesses in general, and in your industry in particular, and uncover facts on which to make marketing decisions (e.g., pricing, terms if facility is bought or leased, industry multiples, equipment pricing).
  
• Marketing research allows you to discover, approach, and market to buyers who may not have realized the significance of buying your business.
  

The fact is that if you have a good business, people will want to buy it. Actually, even if you don't have much of a business, someone might be willing to buy it, depending on the price and terms. In other words, at any given time there are likely to be a number of people who might be interested in buying what you have to sell. The problem, then, is finding and attracting them. However, the last thing you want is for every prospect, be they rich or poor, experienced or inexperienced, to come banging on your door. If you have a less-than-successful business or are asking too much money, it may come down to that, but this is not how you begin attracting customers for your business. You begin by drawing up a list of potential buyers based on three criteria:

• Who can afford to buy my business?
  
• Which of my competitors would benefit most from buying my business and will therefore be willing to pay the most?
  
• Who will be put at a market disadvantage by my selling the business to someone else?
  

Putting together a list based on who can afford to buy your business is an essential first step. Of course, when you're selling a business, you want to find, or create, more than one buyer, but you don't want to waste time with those who can't afford your price or terms of sale. Paradoxically, your most motivated buyer, someone who desperately wants what you have, might be someone who can't afford your business, and there's no benefit to you in pursuing such a prospect. The best way to determine what companies are likely to have the kind of money you're looking for is to use common sense. New owners are likely to be highly leveraged, while owners who have had successful businesses for a number of years probably have substantial net worth, such as Level 4 owners or owners at the success end of Level 3. In considering possible buyers, though, you should not limit yourself to your local market, because there may be an owner in a neighboring market who wants to expand, or an owner in the supply chain who would be interested in your business, such as a distributor who wants to buy an end-users' business, or vice versa.

When you're considering who would benefit most from buying your business, it's a good idea to try thinking a bit outside the box. For example, there may be a candidate for your business in another city who has children ready to take over a company and is looking for an opportunity to put one of them into business. There may also be a competitor who would automatically gain a significant share of the market by buying your company, and through economies of scale create a competitive advantage for his or her business. In both of these cases, as well as in others, your company can have value beyond the pure, financial mathematics of a business purchase, and that additional value can motivate those potential buyers to pay more for your company than others might. If you are considering selling to other companies like this, however, it's up to you to make sure they know your business is for sale.

As noted earlier, it's also important to take into consideration those potential buyers who might be disadvantaged by your selling to someone else. For example, some of them might not be overjoyed at the prospect of buying your company at the moment, but believe they can't afford to have you sell to a competitor because it would give the acquiring owner too much of a market advantage. Others might feel compelled to buy your company because they feel that allowing you to sell to someone else would result in their losing the opportunity to have a broader product line. The bottom line, so to speak, is that any company that can't afford to let a competitor acquire what you have is a willing and motivated buyer. And it would be to your advantage to determine, as best you can, which companies these might be.

Regardless of the circumstances, you will invariably have a better group of buyer candidates if you become proactive and pick out and plan who you want to attract as buyers. Your most willing buyers will be easier to recognize once you have taken the time to understand your specific exit goals, the market for businesses, and the rules of engagement, as well as defined your business well enough to give buyers a clear understanding of what they're buying and what a great opportunity you are presenting them.

As far as selling is concerned, there are only two ways to sell a business—an asset sale or a share sale. An asset sale is one in which you sell the assets associated with the business, including goodwill, but the seller retains responsibility for all the liabilities associated with those assets. A share sale is one in which you sell the company's assets and the buyer assumes all the liabilities associated with the business. The more knowledge you have about the differences between an asset and a share sale, the better and more informed a decision you will be able to make, and the better your chances of maximizing your business's value. If you are unfamiliar with the difference, you should have an accountant explain them to you.

When you are first beginning to enter into negotiations with potential buyers, price is usually their primary concern, and they are likely to want to know what it is sooner rather than later. At this point, though, your primary concern should be to develop a presentation that provides those buyers with the information they need in order to make an informed decision. There are essentially three elements to this presentation. The first is explaining to them exactly what it is you are selling; that is, which assets will be included in the sale and their book value and replacement cost. The second concerns whether the real estate is to be part of the total sale price, if you would consider leasing your facilities, or if you would be passing on a third-party lease and how you attach a value to it. And the third is telling the prospective buyer about your past profits and why these profits will have to be taken into consideration in the overall purchase price.

So regardless of whether you are offering an asset or a share sale, the first step in the selling process is to provide the potential buyer with your sales and value story; that is, to do your sales presentation. After you've made your presentation, if there is still interest on the buyer's part, you should work together to draw up a plan so you will both know what will happen at each step of the process. For example, you may want to start with a confidentiality agreement, after which you could begin to explain the specifics of your business. Next, assuming the buyer likes what he or she has heard, the buyer would be expected to provide some sort of assurance that he or she is in a strong enough financial position to buy what you have to sell. Once this has been done, the next step might be for you to release your business's financial information. Regardless of what kind of process you set up, it is important that there be one. A selling process gives you control, helps both of you focus, and, if the negotiations stall, enables you to go back to your last item of agreement and use it as a new starting point to look for common ground.

Regardless of the type of business, at the core of almost all business sales, there are essentially three things for sale: goodwill, assets, and real estate. Goodwill, as I mentioned earlier, is the amount sellers ask buyers to pay above and beyond the value of the company's assets to compensate them for the future profits they will be giving up by selling the company. This amount is usually calculated based on a number of years. For example, if your business averaged $1 million a year in profits over the previous three years, you might ask for a goodwill payment of $3 million. However, goodwill is difficult to negotiate because of its subjective nature. That is, although the company's profits represent actual figures, how much the seller is entitled to receive to compensate him for selling the company is obviously open to debate.

Nevertheless, the question of goodwill is a good place to start the negotiation process, because if you are going to insist on receiving goodwill, it should be put on the table up front. That way if the prospective buyer is unwilling or unable to pay goodwill, you will know that he or she is the wrong buyer, and it's best to know that sooner rather than later. However, if you do start the negotiations with a discussion of goodwill, it may not be advantageous for you to get down to the final goodwill number right away. Instead, you would be better served by spending some time selling the concept of goodwill and what it covers, such as your customer base, internal processes, experienced employees, and future profits. This is important because your buyers may not know what goodwill actually includes, and it's your job to tell them so you can be sure you're talking about the same thing.

After goodwill, the next item to be taken into account in a sale is the company's assets. Assets, in this sense, are the physical items the company owns; that is, machinery, vehicles, computers and office equipment, inventory, and anything else that should be listed on your company's balance sheet. So if you and your potential buyer can come to some sort of understanding regarding goodwill, the discussion about assets should be considerably easier. You provide a list of assets and negotiate a price based on either their replacement value or their book value, or somewhere in between.

The final element of the sale is the real estate. In most cases, an outside appraiser is brought in to determine the price, which makes the real estate transaction fairly straightforward. However, as I've alluded to elsewhere, in business, even things that look routine often are not. For example, in a fair number of cases, even after both parties have agreed on an appraisal valuation, they discover that the lending institution's terms and conditions drive up the anticipated operating costs so the buyer needs more cash than expected. That is, the down payment he or she has to make turns out to be larger than anticipated, which leaves the buyer with less cash to pay for goodwill and assets. This situation presents a problem for both parties, and it would accordingly be in both of their interests to find a solution. One way of dealing with it might be to work out a leasing agreement. Making such a deal can actually be beneficial for both sides, because it can lower the buyer's costs and free up down payment cash that the buyer can then use to pay for goodwill and the company's assets.

In the end, no matter how you look at it, the stakes are always high when you're selling a business, and negotiations are never easy. Ultimately, how successful you will be in selling your business comes down to attracting the right qualified buyers, developing a strong value story, being flexible and creative, and having good negotiating skills.

At this level, keeping the customer means something different than at all the other levels. At Levels 1 through 4, it means getting them to come back after an initial purchase and buying from you again. At Level 5, it means keeping all your potential buyers interested in what you have to sell—your company—until either they or someone else buys it. Accomplishing this is tricky at best, particularly since the time frame can be so long. It is necessary, though, because until the sale goes through you can never be sure who the ultimate buyer will be.

Eventually, of course, you will have to choose someone to take to the dance; that is, you will have to get serious about a particular buyer. Unfortunately, that means the other potential buyers are going to feel left out in the cold. And while you don't want to burn any bridges, stringing potential buyers along is never a good strategy, because they are likely to know far more about what is going on than you think they do. The problem, then, is how to move forward with the buyer you are most interested in selling to while, at the same time, keeping other potential buyers from giving up. At this point, you have several options. One is to tell potential buyers that you have another interested party and need to evaluate their competitiveness. Another is asking all your potential buyers to put up a significant deposit to demonstrate their interest in buying your business. And a third is drawing up a negotiation schedule that will allow you to negotiate with several buyers at once. Each of these options has its obvious downside, but they have a common upside, which is that one of the potential buyer may not want any other competitors to be considered, and accordingly surprise you with an offer you may not be able to refuse. At the very least, though, it is essential that throughout the process you stay on respectful terms with all your potential buyers.