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There is a difference between selling real property and selling an ongoing business operation. Commercial real estate is simply defined as any property owned to produce income and includes stores, malls, office buildings, and industrial park. Real estate is the "brick and mortar" housing the business. The business is the service provided, product or good produced that meets the need of society in some way. Selling the real estate and the business are 2 seperate transactions.
"When the time comes to sell your business, there are several big issues you want to consider to make sure you have the right buyer and the right deal for your business.
Here's a summary of five such issues, and how to identify them."
Selling at the wrong timeJust like everything else in life, timing is important. When interest in business acquisitions, also known as the “M&A” market is strong, then the prices paid can on average be 20 percent to 30 percent higher than when supply and demand are balanced. When the M&A market is slow, the discount price required to sell a company can be 20 percent to 30 percent lower.
While it is important to go to market when the company is ready, it is just as important that the market itself is favorable. After all, the difference between a seller’s market and a buyer’s market can total 50 percent or more. For those considering a sale, 2015 was a record year in M&A both in terms of prices paid and number of closed transactions.
Selling at the wrong priceSetting a target sale price based on the owner’s opinion or on an “industry average” can result in not selling at all (priced too high) or giving away significant equity (priced too low). The right approach is to have a valuation done by an experienced advisor that understands business valuations as well as the premiums to be paid for intangible assets such as intellectual property, employees, etc. These intangibles can often represent more value than tangible assets.
Once a target number has been established, try not to name an asking price but have buyers make offers. The right buyer will often pay more for a company than anticipated, largely because of the values that they assign to intangible assets and how those will be of benefit to their current business operations.
Selling the past instead of the futureEveryone tries to minimize taxes, so past tax returns may be the worst documents to support current market value. Have a CPA or other professional “recast” your historical financials to show what they would have been if the company had been managed to maximize cash flow instead of minimizing taxes.
Then add a five-year projection based on a reasonable expectation of growth, in other words, explain the past but sell the future. Aim for a strong but believable story as to the upside potential for your company.
Selling to the wrong buyerWhile businesses are sometimes acquired by competitors, this is often a poor place to start your search for a buyer. A current competitor will generally offer less money while using the fact that you are looking to sell as a competitive weapon against you. Cast a wide net for buyers from as many industries as possible, including private investors that are purchasing for yields and for growth potential. There are a significant number of investors looking to invest in a company and then provide resources with an eye towards reselling a larger company in a few years’ time.
Try to get more than one buyer interested in your company at the same time, creating an “auction” effect for better pricing and terms, and to give you more options to decide what makes the most sense to you and who to sell to. Having only one buyer will put you into a position where you have little or no leverage if they decide to change the offer during the negotiation period, which can happen. With multiple offers for your company, the initial terms are likely to be better and you should have a Plan B if negotiations with the first buyer fall apart.
Selling with the wrong structureOne potential deal structure that sellers may want to avoid is taking installment payments for the entire value of the business. If the new owners fail to run the business adequately or the burden of more debt service proves too much to handle, the seller could risk the possibility of getting the business back via foreclosure and in less valuable condition. This is especially disastrous if the buyers were employees or family members.
Although long-term capital gains tax rates are not as favorable as they once were, they are still well below historical levels and about half of ordinary income tax rates. Remember that it is the after-tax bottom line which you get to keep, regardless of the initial top line offer. And since your tax situation can be different from year to year, always check with your tax accountant before making any decision on the structure of a deal you are considering.
Generational Equity is an M&A consulting firm serving lower middle-market privately held businesses in North America. If you are currently considering an exit strategy, please contact Rob Aldridge or call 469-816-3291 for further information regarding a complimentary review regarding the potential marketability of your business.
Karen Schaaf ACP, GRI
RE/MAX equity group
Lackman Commercial Group
Licensed in Oregon