Posted by: bizsale | July 13, 2009

What should be included in a Letter of Intent (LOI)?

The document that a buyer submits to signify interest in doing a deal is usually a Letter of Intent (LOI).  A LOI is a non-binding expression of interest in doing a deal.  The thoroughness of LOIs vary greatly.  Some buyers and business brokers use a very basic LOI that is limited to saying something like “This letter is a non-binding expression of interest for John Doe to acquire ABC, Inc.  John Doe wishes to conduct due diligence, and if there are no adverse findings, then he will formalize his interest in a binding purchase agreement.”  I strongly advise seller clients against agreeing to such a vague LOI.  While buyers will expect that a LOI is non-binding, that doesn’t mean that the anticipated terms can’t be addressed.  I recommend that as many of the major anticipated deal terms be covered in a LOI as possible.  This helps increase the probability that the buyer and seller will be able to form a binding agreement after due diligence.  Without covering major terms in a LOI there is the risk that the parties may develop significantly different expectations.   Some of the deal terms that I usually want to see included in a LOI include:

  • amount of cash paid at closing
  • amount and terms of any seller carried financing
  • amount and any contingencies related to external financing
  • the terms and amount of any anticipated earn-out
  • whether the transaction will be structured as a stock sale or an asset sale
  • any assets that will be excluded from the sale
  • whether current assets will be the property of the seller or the buyer
  • whether current and long term-liabilities will become obligations of the buyer or whether the business will be transfered unencumbered by any current or long-term liabilities
  • the time commitment, nature, and any compensation related to a training and transition period
  • any on-going support that the seller is going to provide
  • the general terms of any seller employment contract
  • the general terms of any non-compete agreement anticipated
  • financing contingencies
  • due diligence deadline
  • the date by which a binding purchase agreement must be drafted
  • the date by which a binding purchase agreement must be executed
  • the closing date

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Posted by: bizsale | July 8, 2009

Important Tax Court Ruling for Entrepreneurs

In today’s Wall Street Journal there is an article, “Entrepreneurs Win Tax Case Versus IRS“, that says that a Tax Court decision has been reached which will allow investors in certain kinds of businesses to deduct losses against salary and investment income.  The article goes on to say that this is a change from the current situation where “investors often can only deduct losses in a business against future profits from the business, which in some cases prevents taxpayers from getting to use the deductions at all.”

The article includes an example of how this may benefit entrepreneurs:  ”Suppose you have interests in two businesses, each organized as a limited-liability company. You work six hours a week in each of these businesses. Together they post losses of $175,000. You also have $200,000 of salary and investment income. According to the IRS, you have $200,000 of taxable income. But under the Tax Court decision you would have only $25,000 in taxable income, because the $175,000 loss can offset your other income.”

If you think this may help you, you may want to contact your CPA for more info.

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Posted by: bizsale | July 6, 2009

Who is buying businesses right now and what are they looking for?

I have recently been asked by business owners who are considering a sale, “who is buying businesses right now and what are they looking for?”  There are actually a surprisingly high number of business buyers with capital looking to buy right now, but many are highly selective about the businesses they are willing to buy.

Codiligent business broker’s database contains hundreds of active buyers.  Here is a sampling of these business buyers and what they are looking for:

Contact #1000006471 is a Private Equity Group looking for niche manufacturing, distribution, and service businesses located in the US and Canada.   They are looking for companies with proven, equity-oriented management; defensible market positions; franchise value in the product or service supply chain; attractive industry fundamentals; record of consistent, predictable cash flow; and scalable core competencies.  They are seeking small companies with a maximum of $1.5 million in annual EBITDA and a sales price range of $1-10 million.

Contact #1000006470 is a Private Equity Group looking for businesses in North America with annual revenues of $5-$50 million that have a history of profitability and revenue growth, low technology risk (no internet companies), limited cyclicality, high employee retention, have identifiable growth opportunities, and are positioned in a growing or fragmented industry.  They do not invest in gas stations, restaurants or convenience stores.

Contact #1000006099 is a Private Equity Group looking for light manufacturing, distribution, and product-based businesses within a 100-mile radius of Portland, Oregon.  They require a scalable business model or product.  They are not interested in retail businesses.  They will consider companies with $1-$10 million in annual revenue, that have EBITDA margins of 10%-20%.

Contact #1000006088 is an Individual Buyer looking for marketing focused businesses located in the Portland, Oregon area with a price of up to $1 million.  He is not interested in main street retail, restaurants, or heavy manufacturing.

Contact #1000005947 is an Individual Buyer looking for B2B sales, distribution, lighting wholesale/retail, and electrical contracting businesses located in Portland, OR; Bend, OR; and Seattle, WA.  He hasn’t specified a price range, but if a business is financeable he may be able to go up to a price of $2 million.

Contact #1000005684 is an Individual Buyer looking for manufacturing businesses throughout the US.  He hasn’t specified a price range, but if a business is financeable he may be able to go up to a price of  $3 million.

Contact #1000006454 is an Individual Buyer looking at a variety of industries in Portland, Oregon except for restaurants.  He is seeking a minimum of $100k in Seller Discretionary Cash Flow, and seeks a price range of $200k-$600k.

Contact #1000005230 is a Private Equity Group looking for business service companies throughout the US.  This buyer is NOT interested in contract manufacturers, job shops with minimal engineering components to the production process, real estate, financial services, and staffing companies.  They are seeking businesses with a minimum of $8 million in annual revenue and $1 million in EBITDA.

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Posted by: bizsale | July 3, 2009

Odd: Business Broker Insists on Very Short Listings

I had a conversation with another business broker the other day that I found to be a bit odd.  He told me that the longest he will do a listing agreement is 90 days, and that he believes that any good business that is priced appropriately will sell within that time frame.  I suspect that when he said “priced appropriately” it is code for priced at an average to below average price and usually with generous seller carried financing.

I believe that 90 days is an unrealistic time frame for selling a business, and it is at odds with doing what is right for your client.  Consider this:  In Portland, the average marketing time for a house right now is more than 150 days.  Even in a strong economy, the average marketing time for a house is usually between 60 and 90 days.  Businesses are far more complex and appeal to a much narrower market than a house does, so it is difficult to imagine how anyone would think that a 90-day listing is appropriate for a business.  I’ve seen different business broker surveys/studies that indicate that the average marketing time for a small business ranges from about 6.5 months to 9 months.

As a business broker at Codiligent, it is my goal to work with sellers to determine an appropriate pricing strategy that is based on their goals and timeline.  Consequently, I do a very thorough analysis up-front to determine a realistic range of value for a business.  I then discuss that range with my client along with their goals, expected time frame, and appetite for risk.  We then determine an appropriate pricing strategy that is consistent with their goals.  For example, one client may be anxious to sell their business quickly, and is less concerned about the price and terms.  That client may decide to price the business on the low end of the range of value and offer generous seller carried financing.  Another client may not be in a hurry to sell, but may want the best possible price without carrying any financing.  For that client, a price that is at the upper end of the realistic value range may be appropriate but with the expectation that it may take far longer to locate a buyer who is willing and able to pay for the business without seller financing.  My listing agreements are for eight months and I am happy to extend them if in eight months the business has not sold.

Someone who has spent years building a business deserves a broker who will devote the time necessary for a successful sale at a price and terms that meet their goals, not an impatient broker looking for deal churn.  For many business owners, a business sale is a once-in-a-lifetime event:  choose representation wisely.

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Posted by: bizsale | July 1, 2009

Sign it is time to sell your business #10: you are within five years of when you want to retire

There are a variety of conditions that may indicate that it is a good time to contact a business broker to explore exit strategies. This blog post is part of a series about signs or indicators that it may be time to consider a business sale or exit.

Sign it is time to sell your business #10: you are within five years of when you want to retire

Many business owners underestimate the amount of time it will take to sell and completely exit their business.  The average marketing time for a small closely held business is between 6 and 9 months (depending on what surveys you look at).  However, often there are things that need to be done to prepare the business for sale including gathering and organizing important information, discussing tax implications with a CPA and/or financial advisor, having a broker or intermediary value the business, having the broker or intermediary package the business, etc.  Then after the business has actually sold, it is not uncommon to have a transition period of anywhere from two weeks to three years – which will largely be influenced by how dependent the business is on the seller.  Furthermore, if you are within five years of when you want to retire and something unexpected negatively impacts the business, you may need to continue operating the business longer than anticipated in order to fix the problem before actively marketing the business.

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Posted by: bizsale | June 23, 2009

Green/Sustainable Business For Sale at a Great Price

Have you been looking for a green business for sale?  How about a sustainable business for sale that is also easy to operate?  What if there was a recycling business for sale that is not only green and easy to operate, but also had the advantages of being internet marketed?    Here is a business for sale that may fit the bill:

This business recycles books.  After acquiring used books by the truckload, the  books are processed using sophisticated work-flow management software that allows high volume throughput.  Good quality books are listed on Amazon, eBay, Half.com, ABE, and Alibris.  The remaining books are sold to recyclers. There is less than 1% waste created by this green business.

This sustainable business is also an E-Commerce business.  An internet business doesn’t require a high-price location, doesn’t have to be open on evenings and weekends, and has an international instead of a local market.

A high degree of systematization make this business easy to learn & operate. The strong systems allow the business to hire low skilled easy to replace employees.

This is a sustainable business: books are a huge store of greenhouse gas.  Carbon dioxide is released if books are burned or decompose in landfills. This business recycles over 100 tons of books each month, offsetting carbon dioxide emitted by burning 50,000 gallons of gas.

One of the biggest opportunities for growing this business is simply to operate it as a full-time business.  The current owner puts in only 10-15 hours a week of time operating this business.  Full-time entrepreneurial management efforts may lead to significant revenue and profit improvements.  There are a variety of other opportunities for entrepreneurial growth such as selling higher margin used CDs and DVDs and replacing portions of the current expensive licensed software with a custom developed software to reduce expenses.

One of the nice things about an e-commerce business is that there is a virtually unlimited marketplace: the business does not rely on a limited group of local customers.  This business doesn’t really compete with mega e-tailers like Amazon.com, eBay, or Alibris, rather they collaborate by offering their products for sale through the on-line marketplaces established by the e-commerce giants.

The business is operated out of a well-laid-out warehouse consisting of 10,008 usable feet with a monthly lease rate of $3,283 per month NNN. All of the furniture and fixtures are in good repair and are worth approximately $90,000. There is a well-thought-out work flow to the operation that cause it to be efficient, with a systematized, easy-to-follow, work-flow process.

The business is priced at $150,000 plus inventory, and the seller will pay off all current and long-term liabilities at closing.

2008 Sales:                      $1,639,399

2008 Recast Earnings:       $103,696

Price:       $150,000 plus inventory

For more information you may view this PDF document: Initial Information Package Listing 1000005521 or call or email Eric at 503-535-8817 or E@codiligent.com.

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Posted by: bizsale | June 15, 2009

Sign it is time to sell your business #9: a lack of time and capital to pursue another dream

There are a variety of conditions that may indicate that it is a good time to contact a business broker to explore exit strategies. This blog post is part of a series about signs or indicators that it may be time to consider a business sale or exit.

Sign it is time to sell your business #9: a lack of time and capital to pursue another dream

Are you really doing what you want to be doing?  Sometimes it is difficult to step back and put things in perspective because we are most comfortable with the familiarity and security of what we are already doing.  Perhaps your business is interesting and produces significant reliable cash flow, but you aren’t really living your dreams.  Or even worse, maybe you are bored to death, and long to do something else but you feel constrained by golden handcuffs – you ask yourself what sensible  person would exit their stable business for the risk and uncertainty of a new life goal.

However, a sale of your business may provide the capital and time necessary to pursue your dreams.  If you’ve built a successful business you likely have developed significant general management and entrepreneurial skills that should increase your probability of success in a new venture.  If your dream includes a new business venture, it is important to not only consider what you are giving up in cash flow by selling your business, but also the opportunity cost you are incurring by STAYING in your current business.  For example, if your business currently has $700k of cash flow but you believe a new venture will have a high probability of generating $2 million+ in cash flow, then a simplistic way of looking at your opportunity cost is that it would be about $1.3 million a year ($2 million expected minus your current business’ $700k) by continuing on your current path.

Perhaps your dreams don’t include a new business – perhaps they include doing humanitarian work in Rawanda, sailing around the world, or getting a PhD in history.  Your most precious commodity on earth is time.  Some of your dreams may never be realized if you wait until you are older and not as physically capable or as mentally sharp.

Regardless of whether your dreams are business or personal, it is important to remember that selling your business will likely take significant time.  A meeting with a business sale advisor, like Codiligent LLC, may reveal that you will have a better chance of selling your business for an appropriate price if you defer a sale of your business for a year or two while you make some changes.  Even if your business is well positioned to sell, it is not uncommon for a business sale to take several months or sometimes even more than a year.  Often, after a business sale transaction closes, a seller will need to have at least some limited involvement for a reasonable transition period.  Consequently, even if you don’t want to exit for a couple of years, it may be wise to contact an advisor now to start planning for your exit.

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Posted by: bizsale | June 9, 2009

Sign it is time to sell your business #8: risk of unacceptable value loss if unforeseen event occurs

There are a variety of conditions that may indicate that it is a good time to contact a business broker to explore exit strategies. This blog post is part of a series about signs or indicators that it may be time to consider a business sale or exit.

Sign it is time to sell your business #8: risk of unacceptable value loss if unforeseen event occurs

Many business owners have a very large percent of their wealth tied up in the value of their business.  As is the case with many types of investments, the closer a person gets to retirement, the greater the risk is that if an unforeseen event causes the business to lose value and marketability that the person may not be able to financially recover prior to when they want to retire.  An unforeseen change could be in the form of a competitive threat, new technology, legal problems, a loss of staff, a shift in government regulations, a natural disaster, a significant problem with suppliers, a collapse of distribution channels, etc.  In an ideal world, if such a problem occurred a business owner would resolve it and restore any lost value to the business.  Yet, doing so can take time – perhaps several years.  Consequently, if a business owner would view having such a loss to be unacceptable, it may be an appropriate time to consider a sale to gain liquidity which can then be re-invested in lower-risk, more diversified investments.

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Posted by: bizsale | June 1, 2009

Sign it is time to sell your business #7: lack of management skill necessary to take business to the next level

There are a variety of conditions that may indicate that it is a good time to contact a business broker to explore exit strategies. This blog post is part of a series about signs or indicators that it may be time to consider a business sale or exit.

Sign it is time to sell your business #7: lack of management skill necessary to take business to the next level

It is not uncommon for a business to grow to a point where the owner and/or the current management team don’t possess the appropriate skills, knowledge, or experience necessary to take the business to the next level.  For example, a rapidly growing company with potential strong mass market appeal may have succeeded in expanding from a local business to a regional business, but key management may not have the experience or skill necessary to grow the business exponentially to a national brand.  Or, perhaps your business manufactures and distributes products domestically, but there is the perception that creating a strong distribution network throughout Central and South America would be the most logical method of growth, but you aren’t sure how to go about this, you aren’t familiar with the cultural nuances that may need to be addressed, and are not sure what legal and accounting issues may be involved with expanding internationally.  

If you reach a point where you aren’t confident of your ability to successfully manage growth of the company to the next level, you could hire someone to assist with that expansion.  However, there is a risk that because of your lack of experience, that you may not be as adept at even knowing what attributes you should be looking for in new management talent (the old adage, “it’s important to know what you don’t know”).  The danger, of course, is that you plow forward beyond your current competence level, and the business struggles and becomes worth far less (or worse – isn’t worth anything) than if you had sold it while it was doing well and the growth opportunity was still unexploited.   

If you have a business that has $7 million+ in annual revenue you may not need to sell and exit at the same time.  There are private equity groups who would love to have an owner stay on in some management capacity, but the private equity group will also help identify and bring in additional management with the skill and expertise to successfully grow the company (and will bring in expansion capital, as well!).  It is not uncommon in this type of deal structure for a seller to financially benefit from the growth in the business after the private equity group’s investment.

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Posted by: bizsale | May 19, 2009

Sign it is time to sell your business #6: inability to meet customer demand

There are a variety of conditions that may indicate that it is a good time to contact a business broker to explore exit strategies. This blog post is part of a series about signs or indicators that it may be time to consider a business sale or exit.

Sign it is time to sell your business #6: inability to meet customer demand

If you’ve been reading this series of blog posts you will notice that this “sign it is time to sell” is related to the past couple of postings.  If you are turning away customers, late in delivering products and services due to lack of capacity, or simply not marketing your business because you have more business than you can handle then it is time to give serious thought to whether it may be an appropriate time to sell.  

A business that is turning away customers may be seen as a huge opportunity for a buyer who may be willing to make the financial investment, staff up, add space and machinery, etc. that you have been unwilling to do.  If you are experiencing a lack of capacity and choose not to sell the business,  but don’t remedy your ability to meet customer demand, then you risk an eventual loss of customers due to dissatisfaction and are inviting an aggressive competitor to enter your marketplace to meet the unsatisfied demand.  


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