The year 2011 is here and if you’re like me you are hoping for continued health and peace in your life, but also for prosperity. Given the economy of recent years, I’m sure we are all hoping for a better financial future. At the close of 2010, the unemployment rate in our country was at 9.4%. This is slightly lower than the 10% unemployment rate at the end of 2009; but both numbers are quite a jump from two years ago with 2008 ending in a 7.4% rate.

Though it can be said that there are jobs out there if you’re willing to go get them, I truly feel that I am one of the lucky ones still. I have a job and it’s a bit ironic that from where I sit at my job at a business brokerage, I see very clearly how the economy has affected many other people, as well as our business itself. This isn’t a forum on the reasons for the economic decline I believe we have suffered, but merely observations. So many people have lost their jobs and one of their options is to take what they have and invest it in purchasing their own business so they have a sense of control over their financial futures. I have people contacting me from across the country looking to move to the Raleigh area and buy a business. According to portfolio.com, in 2010, Raleigh’s metropolitan population has increased by 37% since 2000, outgrowing any other major market. The city has become known as being the major metropolitan market that offers the best quality of life in the country. For the last several years, Raleigh and its surrounding areas have also topped CNN’s and Kiplinger’s lists of best places to live or launch a business. It’s no wonder that a significant portion of my contacts are people from out of state.

Having said that the Raleigh area is becoming increasingly popular, that of course doesn’t mean that buying a business is quick and simple. There are so many factors that go into it, too many to discuss in a blog, but the obvious ones are type of business/industry, location, price, and size. Someone recently said, and we have always completely agreed, that buying a business is a very emotional purchase, as well as being one of the most important decisions in your life.

There are many ways to begin the search; just check online on any of the sites that offer businesses for sale. The process, beginning with you signing buyer documents, including a confidentiality agreement, will unfold as you begin communication with the brokers or sellers in charge of the listings. Keep in mind that even though brokers generally work for the sellers, that doesn’t mean you aren’t treated fairly and with honesty. Even so, make sure that as a buyer you get all the information you need to make the right decision for yourself. It’s the seller or his agent’s job to supply you with financials and other information that may be necessary for you to make an accurate assessment of the business they are marketing to you.

If the process is too overwhelming for you or you just don’t have the time to sort everything out, there are brokers who will either represent you in a transaction or at least work for you to help you understand all the information that comes across your desk. These brokers work as buyer agents. Their fees will vary depending on your situation, where you are in the process, and what you ask them to do on your behalf.

There are options out there for moving to the Raleigh area, to set up your own shop, and to take control of your financial future. There are people available to assist you in the process. Just reach out to the ones that offer you honesty, professionalism and have your best interests in mind.

A large part of my job is to speak with and answer questions from people who are interested in selling or buying a business. More than half the time, I take calls from sellers who have no idea where to start, so they call, not looking for answers to questions but rather for questions that ought to be answered. The questions or answers that I offer come from the experience I have working at a business brokerage; and though at times it appears to be in favor of using a broker, it’s not always necessary or valuable to a seller to do so. The best thing for you to do, as a seller, is to become educated about the selling process, so that you can make the best decision for you.

Below are six questions that sellers ask or should ask themselves before they even begin the process of selling.

Is this a good time to sell? When is the best time to sell?

Depending on such factors as your goals and the financial condition of your business, there are buyers out there looking to buy a (good) business. Timing is also an issue, as you should look at the economic climate forecast for the next 12 months. How will your business stand up to the forecast? Generally, your company should be profitable and the economy strong. For more information, read “Is This a Good Time to Sell My Business,” written by Joe Mills of Entrust Associates. http://www.raleighbusinessbrokers.com/2010/10/28/is-this-a-good-time-to-sell-my-business/

Does my current lease have any effect on a potential sale?

If a lease is involved, you may have to think long term. For example, what are remaining terms of lease, e.g., if you are thinking of selling within next 3 years and your lease is coming up for renewal now, does that mean you will have to sign up for another period well beyond (say, 10 years) the length of time that you are planning to be with the business? Or do you have the option to relocate the business?

I don’t want my employees to know about the sale. How do I maintain confidentiality?

In most cases, sellers are correct in keeping the pending sale of their business in confidence from their employees. Knowledge that their place of employment is up for sale creates unnecessary anxiety for employees, leaving them with insecurity of their job stability, which could in turn lead them to search for other employment.

You can sell your business without your employees knowing about it. You can insist that potential buyers not approach the business or any of your employees for any reason but rather contact you directly or anyone representing you (your accountant, your business broker, etc.).

How do I find buyers? Where do I advertise?
There are a variety of ways to find buyers for your business and they vary depending on the level of confidentiality you require. You can try to sell to a client/customer, an employee, or a competitor. You can list the business on businesses for sale websites or take advertisements out in industry-related magazines. Business brokers have specific procedures and can do all the above without compromising confidentiality.

Do I have to offer owner financing?
While offering owner financing is not an absolute, it does bring in more inquiries to a business sale because it can give potential buyers the feeling that you, the seller, have confidence in the success of the business. The amount of financing you are willing to offer is also not an absolute. You can base your decision upon other terms of the sale, such as ultimate selling price, amount down, or length of time of repayment.

Should I try to sell it on my own or should I hire a business broker?

Depending on what factors are most important to you in the sale of your business would gear you toward selling on your own or hiring a business broker. If you do it on your own, you will need to allocate time away from your business to focusing on addressing buyers’ needs and questions relating to your business. This can often be overwhelming for sellers who operate their businesses.

These were just six of the many questions you should ask yourself before selling your business. I will continue to add to this list of questions and publish them in upcoming blogs as well. But, in closing here, the best thing to do when you’re thinking about buying or selling is to become as educated as possible about the process, especially if it’s your first time around.

The lack of financial integrity is one of the most common hurdles encountered during the process of selling a business.

Reliable financial records are not only a critical element of business management but also support the business’ leverage, profitability, operational efficiency, and its solvency. In the purchase of a business, the buyer will be performing (or hiring an accountant on his/her behalf) some level of financial due diligence. If the buyer is not comfortable when reviewing the company’s past and current financial performance, there is a strong probability that a deal will not be in the making, or at best, the company will be valued at a reduced value.

If a buyer faces a seller of a business who asserts that the company has been profiting, say, $300,000 per year for  each of  the past three years, the seller will be required to prove it. If the seller then produces past financial statements that do not support that claim, are incorrect or incomplete, the buyer will most likely become wary and skeptical and walk away from the opportunity deeming it too risky and not represented with integrity.

Therefore, it is a good idea to know everything you can about your business’ financial statements and position now, so that you can avoid surprises later when a buyer is performing due diligence. You should be ready with the answers to the questions that will assuredly be asked. Manage your business financials so they are transparent, reliable and up-to-date. Buyers want to see a detailed financial history in well-kept books and will not pay top dollar for mediocre records. It is prudent to have your financial records updated after the end of each fiscal month in anticipation that a potential buyer will be asking for those records anyway. Waiting for the buyer to request them only prolongs the effort and the added time spent that will be needed to produce these financial records will only provide the buyer more time to re-think his/her position and additional opportunity to look at other businesses that are also for sale.

October 2010. There is a proverbial saying that any business is for sale if the price is right. While that may not apply to every business, it probably does apply to most businesses. Given the chaotic financial climate we are currently experiencing, is this a good time to sell your business? Surprisingly, the answer for many business owners may be YES! It depends on many factors, including your goals and the financial condition of your business. Here are some thoughts to consider.

• There are buyers out there.  Our economic situation has dictated a lot of fat trimming by all the major corporations.  Many executives and managers that are out of work are determined not to be “downsized” again, and are looking at the advantages of owning their own business.  The economic environment has increased the pool of buyers interested in “buying themselves a job.”  The migration of people from the rust belt to the mid- Atlantic seaboard area continues, many of whom are planning their relocation around the acquisition of their own business.

• It’s better to cash out than to burn out.  Regardless of the success of a business, most owners will eventually burn out.  The right time to sell is when you are on top of your game and the business has lots of energy and excitement.  Burnout becomes a threat to the effective management of the business and, therefore, a threat to the profitability and value of the business.  Potential buyers will sense this either way.

• Have you fulfilled your goals with this business?  Business is dynamic.  If you have achieved your personal goals with your business and are just maintaining it, this may be the time to sell before waiting too long and the business goes into decline.  Buyers and lending institutions are keenly interested in how the business is trending.  They are looking for businesses that have proven upward sales and profitability trends.

• Is the business still exciting and fun for you?  Owning and operating a business is hard work, of course, but it should also have an element of enjoyment.  The day-to-day demands of operating a business are relentless. When an owner becomes bored or has a feeling of dragging themselves through the day it may be time to consider a fresh challenge.

• Do you sense that now is a good time to cash out and move on to new ventures?  If your business model has successfully produced earnings and is trending upward, this may be a great time to consider selling.  Contrary to news reports, banks are making loans!  It is possible for buyers with good credit and appropriate business experience to get approved for financing to purchase a business.

So, is this a good time to sell your business?  It may be an excellent time, depending on your evaluation of your goals and the health of your business.  There are buyers and there is money available. The question is, Is it right for you? You have worked hard and you deserve to maximize the value of your business by selling it at the right time.

One of the most frequent questions we’re asked by Sellers is when to tell their employees that their company is for sale.

In many smaller companies, Sellers look at their employees almost as though they were family and feel an obligation or desire to “do the right thing.”

In general, the best time to tell employees that the company is for sale is AFTER closing.

If Sellers mention the potential sale to employees as the process begins, employees undergo a stressful period not knowing what will happen to the company or to their jobs. In certain industries where jobs are available, employees may leave in order to find certainty. They may also discuss the potential sale with competitors or customers, either in interviews or in other discussions. In the case of one particular business we listed, a Seller decided not to take our advice because she felt so strongly that she wanted her employees to know what was happening. Unfortunately, a large number of employees left the company, thereby greatly reducing its value.

Often times Sellers want to discuss the sale with their employees a day or two before closing. We recommend against this as well. First, it creates some additional level of anxiety, and second, there have been deals that have fallen apart right before, or even at closing.

The best time to tell employees is generally after closing. As soon as the former owner has told the employees about the sale, the new owner can be there to immediately reassure them of their importance to the company as it goes forward, and will hopefully alleviate anxiety before it has a chance to take hold.

As with any “guideline,” there are exceptions based on special circumstances that might be applicable to a particular Seller in a particular transaction. And, sometimes a seller may also have to evaluate and react to buyer requests to speak with employees prior to closing. Those exceptions need to be thought through carefully, and Sellers should be aware of the risks before making a decision to prematurely disclose the potential sale to their employees.

Most small business owners are not familiar with the dynamics of selling a business because they have never sold one before. Most people only buy or sell a business once in a lifetime. While there are lots of potential deal breakers, avoiding the following ten mistakes will help to lessen the probability of having a business transfer transaction never get to contract closure:

1. Neglecting to run your business operations as usual until the entity is transferred to the new owner(s). Do not take for granted that your business will continue to run by itself with the same success and profitability if you decide to cut back on spending the normal amounts of time and money normally needed to sustain operations. A prospective buyer can be easily scared away evenif he/she sees a short-term downtrend in sales and profitability.
2. Overpricing the business – be realistic and cognizant not only of the current financial climate (e.g., lending availability, economic indicators, etc.) but you must take into account the current state of buyer psychology that is driving business acquisition activity trends.
3. Breaching the confidentiality of the sale – keep all conversations private and be sensitive that your employees may be quick to notice changes in your behavior.
4. Not preparing for the sale far enough in advance – have your financial documents up to date and easily accessible. Make your accountant and lawyer aware of your intentions and make sure that they respond to all requests in a timely manner.
5. Not anticipating buyer requests and questions – learn to anticipate from prior discussions with former prospective buyers as to what types of questions will be asked and be prepared to back up your answers with documentation that substantiates your feedback.
6. Not expecting to stay long enough for the transition period – the complexity of the type of business you are selling usually determines how long a buyer expects a seller to stay on for training and consultation. Be realistic and expect to provide the amount of time that you would expect if you were the buyer.
7. Not expecting to sign a non-compete agreement – family members might have to be included as well. This usually is a mandatory requirement and a deal-breaker if an owner does not agree to sign a non-compete agreement.
8. Being inflexible in structuring the transaction – example: expecting an all cash deal. Having a realistic understanding of the current economic climate, including lending availability and buyer willingness to take risks are strong factors that need to be considered when structuring a business sale transaction.
9. Being unwilling to negotiate by being inflexible and unconcerned that all parties on the buy and sell sides need to consider their part of the deal as a “win.” This is critical to making any deal happen. If either party does not feel that they are obtaining what they want out of the deal, it will never get to closing.
10. Not facilitating the closing process in a timely, efficient manner. TIME IS THE KILLER OF ALL DEALS.

Is your business an S-Corporation and you want to sell but you are afraid of the tax consequences of those built-in gains that are not yet 10 years old? Relief may be in sight for some of you!  he recently passed Small Business Jobs Act provides that for purposes of computing the section 1374 built-in gains tax, beginning in 2011 the recognition period is the five-year period beginning with the first day of the first tax year for which the corporation was an S corporation. That ten-year wait is now over at five years, and can mean many extra dollars will stay in your pocket when you sell that business.

Trying to buy a business using an SBA loan for the last two years has been a challenge as banks severely cut back on the volume of these loans.  It finally took government action to pry open a tiny crack in the tight banking fists by increasing guaranteed portions of the loans and eliminating fees. Now with the passage of the Small Business Jobs Act, the government extended some features and added some stimulating features to encourage that fist to open up a little more and begin making more SBA loans. If successful, SBA loans, the primary source of funds when buying a small business, will be more readily available, thus stimulating our country’s lifeline—small business.

The SBA has yet officially responded to the new law but will do so any day by issuing the new SOP, or standard operating procedures for the recent changes in the law. These will be available to lenders any day now. Key SBA-related changes in the bill are:

• Loan Size Increases. The bill increases the maximum loan size for SBA loan programs, increasing the maximum 7(a) and 504 loans from $2 million to $5 million, and the maximum 504 manufacturing-related loan from $4 million to $5.5 million.  In addition, it will temporarily increase the maximum loan size for SBA Express loans from $350,000 to $1 million, providing greater access to working capital loans that small businesses use to purchase new inventory and take on their next order – allowing them to create new jobs.
• Loan Guaranty Increases. The Small Business Association works with local banks to encourage lending to small businesses. They do this by guaranteeing small business loans by 75%. Should a small business owner default on the loan, the bank that made the loan would only lose a maximum of 25% of the loan amount. The SBA would then pay the bank the remainder of the 75%. Under this new bill, the SBA will guarantee 90% of a loan. This increase should even further encourage local banks to lend to business that may be in distress.
• Reduced fees for American Reinvestment and Recovery Act SBA loan guarantees. The reduced fees for SBA loan guarantees enacted by the American Reinvestment and Recovery Act of 2009 (ARRA) are extended to Dec. 31, 2010 (from Sept. 30).
• Retail floor plan refinancing. Creates a floor plan refinancing program, under which the SBA can guarantee open-ended extensions of credit to small businesses if the loan is used to purchase certain eligible retail goods for resale.
• Express loan enhancement. The maximum amount of express loans under Section 7(a) of the Small Business Act is increased to $1 million from $350,000 for one year from the date of enactment.

Other significant changes also found in the Small Business Jobs Act, which can significantly improve the cash flow of small business are listed below. These are good areas to cover with your CPA.

• Increased section 179 expensing.
• Extension of 50% first-year bonus depreciation.
• Zero tax rate on capital gains from IRC § 1202 small business stock.
• Increased section 195 deduction for trade or business startup expenses.
• Five-year carry back of general business credits.
• New deduction for self-employed individuals’ health insurance costs.
• Removal of cell phones from the definition of listed property.
• Limitations on section 6707A penalties for failure to disclose a reportable transaction.

I have some strong feelings about the most effective way to approach negotiations for a business transfer (or for that matter any kind of contract).

Those feelings, along with a bunch of white hair, have developed over the course of negotiating contracts involving hundreds of millions of dollars.  Some negotiators approach contract negotiations as a win-lose proposition. Under this approach, the more “I” get, the less “you” get.  Others approach negotiations from a win-win perspective – let’s see if we both can achieve our goals.

As a young in-house lawyer, I was involved in a classic win-lose negotiation involving a $200 million acquisition. The lawyers representing the seller were from a large New York firm – perhaps the most famous Mergers and Acquisition law firm in the United States. Everything about that negotiation was unpleasant, including yelling by the other party.  And, I was unable to turn the negotiation into a win-win. Even simple points that could have been agreed to ended up being fought over.  The law firm’s style in that negotiation was to wear us down and to provide pressure on every point in a long and detailed contract.

That negotiation had several results.

1.      Neither party ended up with as good a deal as it could have negotiated.  On our side, we had no desire to go out of our way to help the other side, since we felt we were being hammered on every single point anyway. On their side, they were simply uninterested in how the deal looked to us; they were only concerned about their own interests.

2.      The contract took much longer (and cost much more in attorneys fees) to  negotiate, since every point was contentious. The deal came close to falling apart several times.

3.      The parties walked away with an impaired relationship. As the seller, we had little interest in helping the buyer after closing except to the limited extent we were expressly required to do so by the contract.  Particularly, in larger transactions, continued seller help is important to the buyer, and the buyer in this case lost out on much of that help.

4.      The buyer fired this law firm and did not use them on future acquisitions.

As opposed to this type of negotiation with its negative results, I’ve been involved in many win-win negotiations and the results have been almost uniformly positive.  First, let’s examine what a win-win negotiation means. It doesn’t mean giving up significant points that are critical to you. It doesn’t mean agreeing to anything the other party wants.  What it means is rationally discussing concerns that each party has about a particular issue and trying to address those concerns in a way that works for both sides.

Business owners sometimes call me with questions about selling their businesses and whether or not they should hire a business broker in lieu of trying to so it on their own.

Why would I hire a business broker? Why would I pay for someone to help me sell my business?

Hiring a business broker does have advantages, some of which I’ll list here.

The first thing I tell someone is that business brokers work confidentially. In most cases, owners do not want their employees, competitors, vendors or customers knowing that the business is for sale. Business brokers will market the business in a confidential manner; they will not give any information that would allow someone to identify it as the seller’s business in particular until those interested parties sign certain documents, including a confidentiality agreement.

Aside from those parties that see the ads, brokers have their own sources for buyers, sometimes in the thousands, that a business seller on his/her own would not likely have. The broker will spend the time not only marketing the business but handling all the inquiries that come from marketing efforts, allowing the business owner to concentrate on continuing to manage the business.

Business brokers advise owners on their options on the value of their businesses and, if an owner decides to sell, business brokers help sell their businesses. That’s what they do. They have the experience of selling more than one type of business to a wide variety of buyers. They have the time and the know-how to get the business transfer complete—to reach Closing—which is the most important end result of a sale. And they have the expertise to act throughout the process to minimize and avoid problems that might occur after Closing as well.

Selling a business is one of the most important and potentially stressful decisions anyone ever makes in his/her lifetime. As you would with any professional, you should expect a business broker to provide expert, professional advice with YOUR best interests in mind. You should expect a broker to fully answer any questions you may have about the selling process, to understand your goals, and work with you on how you may be able to reach them. You should not expect a broker to pressure you toward any decision in which you are not comfortable.

We believe that there are certain circumstances when you may want to explore selling without a broker, and we often discuss that option with sellers.  But, regardless of the ultimate decision you make, we feel strongly that the advice of  professional, experienced business broker should add value to the process and assist you in making the best decision for you.