The important point is that profitability will provide the foundation of the selling price. A well crafted offering letter is a vital requirement for the seller. The main focus should be profit; skip the fluff.
FAIR MARKET VALUE: A DEFINITION
It does not make a bit of difference what you, your lawyer, your accountant, or your brother in law thinks your business is worth. “Fair market value is what a willing buyer will pay a willing seller.” This definition is widely used to define how a sale price is arrived at. In all reality, only the marketplace will answer the question: What is my business worth? Ball park estimates and relating what companies like yours have sold for are used to find the seller’s starting point sale price.
Beyond profitability, the quantifiable factors that add value are:
- Sustainable growth over the last five years.
- The number of proposals on the street
- The historical closing rate for proposed business.
- The number of accounts under contract.
- Age and condition of assets.
- Years of experience and skill of employees.
- Cost saving synergies and economies of scale that the buyer will enjoy when he takes over the business.
Employee handbooks and employee performance evaluation records add value by establishing the quality and stability of the workforce.
Following are some necessary items for a seller to become familiar with and think about:
- Listing agreement: In situations where a broker or intermediary is involved, this outlines fees charged and length of representation.
- Due diligence source information: This is all the documentation needed for the buyer to evaluate business, such as geographic territory covered, an organizational chart, inventory records, accounts, contracts, financial statements, tax returns, etc.
- Confidentiality agreement: This is a signed statement that the buyer and his agents will not disclose the seller’s information.
- Letter of intent to purchase: This is a non-binding, pre-contractual document. It crystallizes oral negotiations between the parties concerning the proposed terms of the transaction. It lists the assets to be acquired, assets not included, liabilities assumed, purchase price of assets, and good will expressed as a percent of revenue, inventory, machines, warehouse, trucks, material and cash handling equipment, employment contracts, etc.
- Term sheet: The buyer’s 1-page outline of the financial proposal, including the gross price less depreciation assumed, total consideration paid, employment contracts, non-compete values, profit maintained bonus, etc.
- Employment stay agreements: These include bonuses for key technicians and managers.
- Inventory and changer funds: These are values paid to the seller at closing. Accounts receivables are purchased by the buyer usually at a discounted rate of 15 percent.
- Purchase and sale agreement: This is a legally binding document that identifies assets purchased, the seller’s representations and warranties, payment schedule and full details of all terms and conditions of the sale. If the seller has assignable employment agreements with key employees, it is viewed favorably by the buyer.
Employment contracts generally include sections such as:
- A non-compete agreement that bars employees from competing directly with their former employer.
- A non-solicitation agreement that prohibits them from recruiting employees or clients of the business they left.
- A non-disclosure agreement that prohibits employees from using information they gained in their former workplace.
A single employment contract can include all of these three provisions.
When preparing to sell, it is also important to clean up any questionable business practices that might have crept into the business over the years. If for some reason you can’t correct them, make the buyer fully aware of the situation. If you don’t, the buyer’s due diligence will discover these items anyway and you will lose all credibility.
Activities that will need to be corrected include:
- Wages paid under the table.
- Services, payments or subsidies made to or received from clients without benefit of a contractual agreement or memorandum of understanding.
- “R factoring” or underpayment of commissions.
- All “side” deals with suppliers, employees or clients.