Murphy’s Guide to Selling a Business

Roger J. Murphy & James H. Sinclair

Murphy’s Guide to Selling a BusinessPublished by Murphy Business & Financial Services, Inc.513 N. Belcher Road, Clearwater, FL 33765877-725-0630www.murphybusiness.comwww.guidetosellabusiness-murphys.com

Distributed by our affi liated companies:Murphy Business & Financial CorporationMurphy Valuation Services, Inc.Murphy M&A, Inc.

Copyright. © By Murphy Business & Financial Services, Inc. 2011 All rights reserved. No part of this pub-lication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording or any information storage and retrieval system, without permission in writing from the Publisher.

Limit of Liability/Disclaimer of Warranty: The Publisher and Authors of this kit make no representa-tions or warranties with respect to the accuracy or completeness of the contents of this book, forms, or electronic material, and specifi cally disclaim all warranties, including without limitation warran-ties of fi tness form a particular purpose. No warranty may be created or extended by our promotional materials, sales materials, or internet marketing materials. This material may not be appropriate or suitable for every situation. This product is sold with the understanding that the publisher is not engaged in rendering legal, tax, accounting or other professional services. We encourage parties to seek legal advice and the advice of other professionals when performing the functions of business transfer. Neither the Publisher nor the authors shall be liable for damages arising here from.

table of contents

acknowledgements

introduction

chapter 1. decide to sell your business

chapter 2. why sell your business?

chapter 3. determining when to sell

chapter 4. how to prepare to sell at a later time

chapter 5. the process, step-by-step

chapter 6. recasting fi nancial statements

chapter 7. determining market value

chapter 8. sample xpressvalu™ report

chapter 9. marketing with a bli and profi le

chapter 10. marketing plan/understanding who’s buying

chapter 11. showing the business

chapter 12. negotiating an offer

chapter 13. sales contracts

chapter 14. due diligence

chapter 15. your team of advisors

chapter 16. fi nancing

chapter 17. the closing process

chapter 18. should you use a business broker

glossary

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introduction

During the many years we have been involved with business brokerage and business valuation, we have witnessed situations where a business was sold successfully and those where the company’s owner was unsuccessful. We have met hundreds of business owners and even more buyers -- or people who thought they were going to buy a company.

The process of selling a business is very complicated, especially for those who attempt this without having a system in place or engaging the services of a professional business broker. It is a fragile process – and one which can be very frustrating and highly damaging to your company if not han-dled correctly. Statistics show that about 70% of all of the businesses that are put on the market are never sold.

The two most common factors that keep a business from selling are the lack of preparation for sale and an unrealistic selling price. Once the business owner decides to sell his company, he must also decide whether to engage the services of an experienced business broker or sell the business him-self. Since you have purchased these materials, we will assume that you have given a signifi cant amount of thought to the idea selling your business. This guide will help you understand what steps are required to complete the process.

Most business owners are not aware of how business valuation works. They tend to assume a value for their company based on emotion or use rules of thumb that they may have heard from a friend or someone who claims to know ”what businesses sell for.” These owners will generally arrive at a fi gure that is much higher than the true market value – and higher than what buyers will pay. Even worse, sometimes an owner undervalues his company, selling it but leaving money on the table.

Part of the sales preparation requires that the business owner be able to articulate a legitimate rea-son for selling. It is important to identify the precise reason and be able to convince a buyer that it is a “life event” -- that is, a factor to you but one that will not impact the operation of the business in the future.

It is also critical to provide buyers and their advisors the information needed to make decisions, obtain fi nancing and complete the transaction. All of this needs to be managed while you maintain

ii

introduction

confi dentiality so as not to destroy the very business that you are trying to sell.

As business brokers, we have met many business owners who wanted to use our services but simply could not afford to do so. Perhaps the business was not profi table, or it was too small to justify the commission that would be charged. Most often, we would simply thank them for their time and move on without being able to help them accomplish their goals.

We have developed Murphy’s Guide to Selling a Business so that we may assist busi-ness owners understand the process of selling a business. Our Xpressvalu™ software tool will help you determine the market price for your business. You may still need to purchase a formal business valuation from a professional business appraiser. For smaller companies the Xpressvalu™ model may be adequate and allow you to determine the appropriate market price (visit www.guidetosellabusiness-murphys.com).

The system outlined in our book will guide you, step by step, through the process and provide examples of the necessary forms. These forms are included in this guide. You can also purchase our complete form library at www.guidetosellabusiness-murphys.com.

While this guide provides you with the forms you need to agree to the terms of a deal, we still strongly recommend that any sale of a business involve the services of a competent business attorney. It is important for both the seller and the buyer to protect their interests and guard against future liabilities. An attorney is the best person to ensure your executed deal is the one to which all parties have agreed.

We hope that, by putting our years of experience working with buyers and sellers of businesses into the pages of this book, we will help you successfully understand the process and what it takes to complete the sale of your company. If you ultimately decide that you would be better served by hiring a professional who is experienced in this area, we hope you will consider Murphy Business & Financial Corporation (www.murphybusiness.com).

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decide to sell your business chapter1

Selling a business is often one of the most important decisions as well as one of the largest fi nancial decisions that an entrepreneur will make in his lifetime. Each year approximately 700,000 to 800,000 small- to medium-size businesses change ownership. Most of them are small owner-operated businesses, such as retail shops, gas stations, quick print shops, dry cleaners, contractors, landscapers, accounting or bookkeeping services, small manufacturing companies and many types of franchise businesses.

No matter what kind of company you own, there is likely to be a buyer out there interested in your business (assuming the price is right) and it is presented to them correctly. Finding the right buyer and selling the business at the right price and terms will require hard work and planning.

This Guide to Selling a Business is designed to help you understand the process of selling: the steps involved in preparing your business for sale, determining the correct market price, fi nding potential buyers, negotiating with those buyers, preparing the sales agreement and other documents, and getting to a closing on the deal. We will provide you with samples of the types of forms that are used in the process and give you step-by-step instructions. Our optional pricing model, XpressValu™ can give you an idea of a market value for the business based on the typical selling price others have realized for similar businesses. For more information visit www.guidetosellabusiness-murphys.com. We can also assist you with a more formalized business valuation report if you should need one. For more information visit www.murphyvaluation.com.

Before beginning this process the most important decision that you need to make is whether or not you are truly ready to sell your company. This is not as simple as it sounds for many business owners. Most have worked very hard and invested many hours a day building the business, and sometimes letting go of a major part of their lives can become diffi cult, especially if it is a family business. People become creatures of habit and become so accustomed to working in their business that it defi nes a major part of who they are. In effect, it is a signifi cant infl uence on their personality.

Because this can become such a diffi cult decision psychologically, some people delay the decision

too long and hold on to a business for too long. If the owner has lost the drive to continue to build the business or at least enough interest to maintain the business in its current form, the time to sell may be at hand. You need to make a commitment to move forward with the sale process and work toward attaining the best price and terms possible for your company.

Selling a business is a time-consuming and potentially lucrative process for both the seller and the buyer. The successful sale of one’s business may determine the style of retirement that the owner will enjoy or perhaps whether or not he will have the funds to invest in a new venture. For a buyer, this business represents new challenges, as well as offering the freedom to be his own boss and the opportunity and the freedom to work for themselves, building a valuable fi nancial asset for their future needs.

Businesses sell based on the value perceived by the buyers. While they are extremely important, the fi nancial aspects of a company are not the only factors a buyer will consider. It is up to the seller to fi gure out what other signifi cant items of value the business has, and how to point them out to a potential buyer. This must be clearly represented to the buyer in the package of information prepared by the seller to market the business. For example, long-term clients, repeat customers, key employees, and outstanding reputation in the community or a strategic location will all be assets that a buyer would consider important in determining the company’s value. Most buyers will be looking for ways to enhance and grow the business beyond its current value. They are looking for the “upside” opportunities not yet realized in the business.

Selling a business is a very complex and sometimes frustrating process. Don’t begin this process without an adequate understanding of the procedures and steps involved and a realistic idea of the amount of time preparations will take. In fact, if you are planning on selling your business at a later date, now is the time to start planning for that event. We will address that subject later in this guide.

This guide is designed to help you understand every step of the process and to provide you with samples of the forms and tools needed to complete the transaction. We encourage you to engage the services of experienced business transaction specialist, however if you have decided to undertake this process by yourself, this guide will give you step by step help to complete the process. For more information on how to engage a personal business advisor please visit www.murphybusiness.com.

By purchasing Murphy’s Guide to Selling a Business you are well on your way to educating and

decide to sell your business

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decide to sell your business

3

Is Selling Your Own Business Right For You?

Consider these questions to determine if this process is right for you.

• Is saving money on broker’s commision important to me?

• Do you have the time to spend dealing with buyers and still run your business?

• Does your business earn enough profi t to attract a buyer?

• Can your business operate by replacing you with the new owner after you provide some basic training during a transition period?

• Do you already have a good idea who the likely buyer of your business will be?

• Will you be comfortable negotiating with a buyer?

• Will you be able to show the business to potential buyers and still maintain confi dentiality?

• Will you seek professional help when a situation arises that you are uncomfortable with?

• Do you understand your business better than anyone else and have the ability to communicate the highlights to a potential buyer?

• Can you spend the time necessary to market the business?

• Are you willing to invest the time that it takes to determine the correct market value of the business?

• Are you willing to spend your own time preparing the materials necessary to present the business to buyers?

• Are you willing to take a hard look at your business and consider ways to make it more appealing to buyers?

• Will you be comfortable dealing with attorneys, accountants and bankers?

• Are you ready to sell your business if the right deal comes along?

preparing yourself on the process of selling your own businesses. Congratulations on making this fi rst – and important – step!

5

why sell your business? chapter2

Exit scenarios for business owners

• Close the business• Accident, illness, or death forces hasty and unprepared decisions• Have a succession plan (family members or key employees)• Sell the business

As you can see, the sale of the business is generally the best situation for the current owner because it will allow him to meet his personal goals and objectives. Also it is important that the seller is operating on his own timetable, which is not the case when an accident, illness or death is involved. Closing a business will result in the seller receiving only liquidation value for the assets and nothing for the goodwill (such as the customer base or the reputation and good name that has been established).

The main objective is to obtain the proceeds for the sale for use in retirement or other investments. Most sellers also state that it is important to see their companies continue to prosper and their employees continue to remain with the business and operate successfully.

Why do people sell businesses?

Retirement - It is just time to retire. The owner has worked for many years and now wants to enjoy the fruits of his labors. This is the most common, and most justifi able, reason for sale.

Failing health or serious illness - This is a very unfortunate reason for selling a business. Since there are certain elements that are out of the seller’s control, this often results in a desire to have a quick sale of the business. This often puts the buyer at a tremendous advantage in the negotiations.

Burnout or boredom - The seller is just tired of the day-to-day grind. Perhaps the seller has lost his passion for going to work everyday and cannot wait to leave at the end of the day. This is one of the top reasons for selling a business and often times provide a good opportunity for a

buyer. If the seller has stopped driving the business and working hard to grow it due to his lost passion, a new owner could see the potential for a turnaround due to a new rejuvenated effort based on a new owner. What is burnout to one person is a new challenge to someone else.

Divorce, disputes - When a business owner is in the midst of divorce proceedings or a family dispute, the business generally suffers. Often times the sale of the business is required to provide for the fi nancial requirements of the divorce or dispute. In cases of a family business where several members of the family are involved in the business, it may be an uncomfortable situation to continue to operate the business, which will result in further damage.

Insuffi cient capital to grow - Often a business with increasing sales will need more capital to fi nance additional accounts receivable, payroll, rent or inventory purchases. Even though the company is generating more money, it becomes much harder to handle fi nancially. The company may not be generating enough cash fl ow or suffi cient working capital to support the growth of the business. An owner may comment, “If I just had more working capital, I could double my business and make more money.” Sometimes it takes new ownership for the business to get to the next level.

Achieving some estate liquidity - Many owners of small privately held companies have most of their personal assets invested in their businesses. They may have reached a comfort level with their operations and do not feel secure investing more capital or borrowing additional money to get their business to the next level. Generally, the older a person gets, the more risk-averse he becomes. While this is often a good reason for selling, many sellers do not feel comfortable giving this as the reason for sale.

Relocation - This occurs when one spouse needs to relocate for an employment situation or for family reasons. Perhaps a change in family status such as a sick family member or the birth of a grandchild in another state is the driving force for the seller to want to move on.

Employee issues - Many business owners fi nd themselves sick and tired of dealing with employees and their problems, needs and wants. However, often times the employees are the company’s key assets. A buyer will be concerned that the key employees will stay with the business after the sale is completed. Nothing will scare off a good buyer more than fi nding out that key employees have left the business to start their own company or to join a competitive

why sell your business?

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why sell your business?

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business. The best time to sell a business is when the employee situation has been stable for a period of time. Good employees are a valuable asset that does not show up on the fi nancial statements but are very important to a buyer.

Competition, economic factors - In today’s economic climate, remaining complacent and refusing to grow the business is not an option. If you are not growing and moving forward your competitors may be catching up to you. If the seller lacks the passion and desire to keep moving forward and growing the business, it is logical that it be sold to a buyer who has the passion and desire to propel the business to the next level. Economic factors in a given industry sometimes force a business to make major changes in its business philosophy. Imagine the video rental store that stubbornly sticks to the business without changing with the industry. Many times changes necessary to keep up with the market demands will require signifi cant investment in new equipment and facilities as well as additional staff. Often times the current business owner is just not up to that level of challenge or commitment of resources.

Unsolicited offer to purchase the business - Sometimes an owner who may be thinking about selling the business will receive an unsolicited offer to purchase the business. This could come from a key employee, a customer, a vendor -- or more likely, a competitor. Sometimes, the business will be sold as the offer is just too good to pass up. The buyer may make an offer for more than the market value due to a strategic reason or desire to expand their business or eliminate a competitor. While this is a wonderful situation to be in, you will still need to go through the steps to properly prepare the business for sale.

While there are many reasons why business owners choose to sell, the reason for the sale will almost always come up early in the conversation. Buyers will want to know why owners are choosing to sell, and it is up to the owner to provide a story that maximizes the company’s perceived value and provides the buyer with the comfort that the seller has a valid reason for wanting to leave the business. Keep in mind that while you may be happy to be rid of your business, it represents a new and exciting opportunity for the business buyer.

As a word of advice; when selling or buying a business, try to look at the situation from the other party’s perspective and attempt to understand his goals and objectives. This may help you understand what information they will be seeking about the business and why he may ask certain questions.

why sell your business?

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The Buy/Sell “Mirror”

To successfully sell, think like a buyerTo successfully buy, think like your seller

Seller’s WorriesWho will buy my business?

How much is it worth?

How do I fi nd a good buyer for my company?

Can I sell it to my good employees?

Which advisors do I need to help me?

How long will it take to sell?

Who will sell me their company?

How much is it worth?

How do I fi nd a good company to buy?

Will the good employees quit if I buy it?

Which advisors do I need to help me?

How long will it take to buy?

Buyer’s Worries

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determining when to sell chapter3

You don’t necessarily need to list your company with a business broker to sell it. You may already have a good idea of who the likely buyer of your business would be. Perhaps a key employee, relative, or competitor has approached you and indicated an interest in purchasing your business. Whether or not you have a buyer in mind, careful planning and timing of the sale are extremely important.

We will address the advantages and disadvantages of using a business broker later in this book in order to give you all the information necessary to make the best decision for your particular situation.

When is the best time to sell your business? There is an old cliché that “timing is everything.” The best time is when you are on top – either your company is riding high or the industry that you’re in is fl ourishing and everything points to next year being even better. This is when you will get the most money or the best terms for your business.

Selling a company at the right time is critical in maximizing a successful transaction. All too often, owners decide to sell without thinking through the question of whether or not now is actually the best time to sell. When you consider selling, you should consider the timing in terms of your readiness to sell and the market’s readiness to buy. However, sometimes circumstances do not allow you to choose the optimum time to sell your business.

A majority of the time, the decision to sell will probably have more to do with your personal circumstances than on the current economic climate. If the timing of selling is left up to the business owner, he would like to sell when the market demand is high. During a time of recession or downturn in the local economy or your business sector, you may want to gauge whether or not it is best to wait until things improve.

Cyclical factors are important

Many businesses are cyclical in nature. For example, a retail store which generates at least one-third

Roger Murphy relocated from New Hampshire to Florida after enjoying a success-

ful career in the publishing industry. Roger had previously been involved in many

magazine and newsletter start-ups and acquisitions. He also managed both a di-

rect mail agency and a publishing-related consulting fi rm.

In March 1994, Roger incorporated as Murphy Business & Financial Services,

working independently from an office located in his Palm Harbor home.

In 1998, Jim Sinclair joined the Murphy team as sales director. Jim has more than

25 years of executive sales and management experience with Fortune 500 corpo-

rations in the manufacturing, construction and business services industries. Prior

to becoming sales director, Jim had owned and operated a successful business

brokerage fi rm in Tampa, Florida.

Roger and Jim strongly believe effective training is the foundation for a successful career, and Murphy Business pro-

vides each broker with a solid educational program. Whether new to the industry or a seasoned veteran, all brokers

joining the Murphy team participate in an extensive training program.

From 1998 until 2006 (when the company began franchising), Roger and Jim owned and operated

30 branch offices with over 50 broker/agents in Florida. In 2006, 26 of those were converted to

franchise offices. Murphy currently has more than 150 business brokerage offices and 350 busi-

ness brokers in the United States and Canada.

Today, Murphy’s corporate headquarters fi ll over 11,000 square feet of offices in Clearwater,

Florida. In addition to the corporate offices, this facility houses the Florida Regional Franchise

Operation, Murphy’s Corporate Services Division, Training Center, in-house Direct Mail Process-

ing and Fulfi llment Center and a complete tele-leads marketing and customer service operation.

As an additional service to our clients, Murphy Commercial Realty, Inc. provides commercial real

estate brokerages, and Murphy Valuation Services, Inc specializes in professional business valu-

ations, machinery and equipment appraisal and machinery and equipment brokerage services.

Roger, Jim and their associates have been involved with more than 4,000 business sales throughout North America.

Roger and Jim have trained and manage hundreds of professional business brokers, which make them uniquely quali-

fi ed to produce these materials for those wanting to sell their own companies.

James (Jim) H. Sinclair,

CMEA, BCI, CTEP

Roger J. Murphy,

CBI, BCI, CBC, MCBC, CBB, BCB

Murphy’s Guide to Selling a Business