ARIZONA BUSINESS BROKERS ASSOCIATION

NORTHERN, CENTRAL & SOUTHERN CHAPTERS

Selling Your Business Frequently Asked Questions

AZBBA business brokers frequently find themselves answering questions like the following:

Why should I sell my business using an AZBBA Broker?

AZBBA Brokers offer a complete program of high-quality, professionally-licensed, services covering all major elements of buying, selling, and financing transactions. They have completed many successful transactions throughout Arizona and know how to get you a fair price for your business. Most AZBBA brokers work exclusively for the seller and have specialized knowledge about business issues in the communities in which they work.

How do the AZBBA Broker and I work together?

The successful transfer of business ownership results from coordination and “good faith and fair dealing” collaboration between buyer, seller, and the broker. The burden of skillfully and responsibly facilitating the transaction process rests with the AZBBA broker. Cooperation between buyer and seller is extremely important for the efficient exchange of operational and financial information. Full disclosure of all material facts is expected from all parties who must respect the confidentiality of the information and knowledge exchanged.

How long will it take to sell my business?

Some sellers think they can always come down on price and hence overprice the business at the beginning of the marketing process thinking this will result in the highest price upon sale. However, if the business is overpriced, buyers will refuse to seriously consider the business, which results in greatly extended time to complete a sale of any kind. Buyers have options and will take their investment elsewhere. In additional to general market conditions, other factors, like the amount of down payment required and other terms and conditions of the sale will affect the time to sell a business too. In general, the more fairly the asking price, the more motivated the seller, the lower the down payment, the more affordable the business, the faster the time is to complete a sale.

How long does it take to complete a transaction?

Although the broker manages the schedule and works to expedite every aspect of the transaction, most deals require one to two months and up to 6 months or longer to close escrow after a executed purchase agreement is in place. It depends on the type and complexity of the transaction. Some smaller transactions can take as little as two weeks.

What can business brokers do to benefit me in setting the asking price?

Business brokers help you decide how to price your business and how to structure the sale. All deals must make financial sense to you, the buyer, and the lender or the deal won’t get done. The broker, however, cannot sell an overpriced business, although the broker can sell almost any business that is priced properly and the deal is structured appropriately. The seller should understand that only the marketplace can determine what a business will sell for. The amount of the down payment you are willing to accept, and the terms for financing the purchase, greatly affects the selling price and the success of the transaction.

What do I need to do to prepare my business for sale?

You should have extensive discussions with their broker about preparations before the business is listed for sale. All buyers expect up-to-date and accurate financial information from your accountant. All legal issues should be addressed and any resolutions among your partners, family or estate need to be completed and documented. Any operational, personnel, customer, supplier issue or problem area should be resolved. And any potential time delays associated with obtaining permits, licenses, contract transfers, etc. need to be known in advance.

Why should I have to finance the sale of my business?

Surveys have shown that a seller who asks for all cash receives on average only 70 percent of their asking price, while sellers who accept terms receive on average 86 percent of their asking price. Businesses that are listed for all cash either don’t sell because of a lack of serious consideration by prospective buyers or can’t be afforded by otherwise capable potential buyers. The purchase must be financed in some other way than “all cash” if a bank loan cannot be obtained. In some cases, seller financing will greatly improve your overall return on the sale and potentially mitigate some tax liability in the process. Additionally, with you having some “skin” in the purchase it communicates to the buyer that you believe that the business can deliver what you say it can.

What contingencies should I expect in a purchase contract?

The AZBBA broker understands contingency requirements and works with buyer and seller to clarify exactly what contingencies need to be addressed in the transaction. The specification and satisfaction of contingencies are an important part of any contract. The nature of the deal and type of business will determine which contingencies are included. Those most common relate to books and records examination, leases, approval of financing, inspections, and others as appropriate.

Am I obligated to help the buyer after the transaction closes?

Almost all transactions have some provision for you to familiarize the buyer after the sale. The broker works with you and the buyer to identify and structure mutually acceptable terms for your involvement during and after the transition to new ownership. This period of time typically ranges from a couple of weeks to a couple of months. Depending on the nature of your business and the aptitude of the buyer, you may be asked to enter into an employment or consulting agreement to facilitate the buyer’s transition into your business.

What is goodwill (blue sky)?

Traditionally, “goodwill” refers to the value attributed to the relationship between the business as a going concern and its customers. Frequently, many other factors that contribute to the success of a business are labeled “goodwill” (see below).

What other factors contribute to the value of my business?

Depending on the specific business, one or more of the following impact the value, hence the selling price of a business, to greater or lesser extents: EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) or SDE (Seller’s Discretionary Earnings), relationship with suppliers, contractors, and manufacturers; history of the company; favorable leases; business location(s); years in business; economic growth potential; stability, quality, and number of staff; how the purchase will be financed; the completeness of books and records; quality of assets; uniqueness of art or science of products and services; transferability of goodwill; barriers to entry fro competition; and favorable industry trends.

What is Seller’s Discretionary Earnings?

Seller’s Discretionary Earnings (SDE) is the discretionary cash generated by a going concern that is available to the owners to spend; including, net income or earnings before income taxes, depreciation, interest on debt service, and all other forms of owner compensation and perquisites. SDE best reflects the return a new owner will realized from a capital investment in the going concern.

Why is SDE important in determining fair market value of my business?

Using SDE in the valuation of a business is based on the premise that a going concern is only worth what it currently earns from the application of all its tangible and intangible assets, not just the sum of all the company’s physical assets.

How is the fair market value of my business determined?

The definition of “fair market value” of real or personal property is the price at which the property would change hands between a willing buyer and a willing seller when either is not under any compulsion to sell or buy and both parties have a reasonable knowledge of the relevant facts. Typically, as a starting point a multiple of EBITDA or SDE for the business is used to establish fair market value. This multiple varies depending on industry segment, size of the business, ROI expectations of the buyer, growth rate of the business, geographic location, desirability of ownership, and many other factors. See discussion on “Valuing a Business”.