Many successful business owners are surprised to realize that even though they have built a profitable business over several years, they don’t know the first thing about selling their business when the time comes. There is a world of difference between running the day-to-day operations of a profitable business and taking that business to the market for potential sale to another owner, an investor, or to a financial buyer, like a private equity firm. For this reason, the majority of business owners who do eventually put their business up for sale on the market in Miami do so via a professional business broker or investment bank.
What’s the Process of Selling a Business?
The process of selling a business begins with first asking yourself, as the owner, “Should I sell my business?” Only you can answer that question. The reasons for wanting to sell a business are many, however, they are often one of the following: retirement, health, or market timing. Perhaps after decades of growing your business and nurturing your team, you want to realize an exit and enjoy some capital gains. Or maybe your intuition or knowledge of your industry is informing you than now is a perfect time put the business up for sale and fetch the best purchase price. Whatever, the reason, if the answer is “yes, I do want to sell my business”, then we can begin.
While many of the clients we’ve worked with through our brokerage in Miami have endless concerns and questions about who will buy their business, or what will happen to their employees after the sale, the best first step in prepping a business for sale is to look at the financial performance in recent years. Has the company earned a nice income? Is business growing or contracting? How have your top customers performed in recent years? Potential buyers hate to see fluctuations in the spending of top customers, and are also very sensitive to any customer concentration. Customer concentration can become an issue if a single customer makes up more than 20% of your sales (sometimes more, sometimes less).
Recently, we worked with a client who had a longstanding relationship with a key customer dating back 15 years. Shortly after the business was sold, the key customer fired some of its sales staff that held strong relationships with our client. The new owner grew concerned. Orders dwindled. And within a few more months, the key customer filed for bankruptcy. This dropped the company’s sales nearly 30% overnight. For a new owner who is still struggling to work through the transition of taking over management of the business, losing a key customer is a nightmare. So a word to the wise, if you have customer concentration issues, address them early on with your business broker and in your investment memorandum.
How Do I Sell My Business
Let’s get back to the process. You sell your business by hiring a business broker or investment banker in the area – either with expertise in selling businesses in Miami, in your general size range, or in the industry you represent. Business brokers, or intermediaries, should have a competency in preparing a business for sale, analyzing company cash flows, and putting together a Confidential Business Review (CBR) or Confidential Investment Memorandum (CIM) to market to potential buyers. Think of these CBR’s or CIM’s as a brochure that lists out all the key components of your business, your customers, employees, products, key differentiators and your financial statements. The package may be a short as a few pages or as long as 50 pages, it depends on the broker. But remember that a broker should also be able to leverage their buyers’ lists and connections to interested parties looking to buy a company of your type or size range in the Florida area.
Brokers are compensated typically by some blend of a small, flat up-front fee, and a commission share on the “backend” of the transaction if your business is sold. In that sense, it’s mostly a pay-on-performance contract akin to that of a real estate agent who you hire to sell your home. At Sell My Business Miami, we charge our listings a flat fee of $10,000 to do the up front work of reviewing your financials and preparing a CIM to send to our lists. We also will attempt to sell your business online by listing it on all the top industry marketplace websites. We then share in a commission upon the close of your sale. This percentage varies based on the size of your purchase price, but goes from 1-5% of the total cash value of the deal. Unfortunately, we can’t sell your business for free.
Recast Financial Statements to Sell Your Business
A big aforementioned piece of the process is preparing your financial statements. As a business owner, you know that your financial statements are the company’s scorecard. These records give any outside party the quickest, truest snapshot of how your business has performed lately. Hopefully, you have “clean” financial records that cover at least the last three years. Potential buyers will want to review your income statements, balance sheet, cash flow statements, as well as lists of key employees and customer relationships. It is also typical to expect to provide copies of the last three years’ filed tax returns. Preferably, your tax returns will have been prepared and/or reviewed by a Miami-based CPA firm.
We will work with you to recast your financial statements. This means that we will sit down and go through all of the business expenses and capital expenditures over the last few years, and determine what should be adjusted on the financial statements to accurately show what the owner benefit is to the owner of the business. To better understand this, think like a buyer. If a small business is showing a net income on the income statement of $100,000, that is just a starting point. But does the owner pull a salary? Like most small business owners, does the owner also run personal expenses like his or her health insurance, cell phone, car lease, and some travel and entertainment through the business? All of these categories could represent expenses that should be “added back” to adjust the net income shown by the business. Because as the owner, these are financial benefits that are enjoyed.
As a seller, adjusting your financials to arrive at what many in the M&A industry refer to as adjusted EBITDA, is a beneficial exercise because it increases the purchase price you will eventually hope to receive for selling your business. Typical businesses we have sold in manufacturing, distribution, software, retail, and professional services go for a 3-5x multiple of adjusted net income. If you show $100,000 in net income on your tax return, but we work together to up the cash flow shown enjoyed by the owner to $200,000, that is a significant difference in purchase price when multiplied by 3-5x.
How Does Due Diligence Work?
After we have spent time fielding offers for your business on the market, potential buyers will submit a letter of intent. Also known as a LOI, this is a formal offer from an investor to buy your business. Before you stand up and shout, “I sold my business! I’m rich!” you should note that this is just an offer. Industry data from places like M&A Source has shown that nearly 2/3rds of all LOI’s do not result in a closed deal.
Further, even if you decide to accept the offer of a given letter of intent, there is still a long process to go through known as due diligence. Buyers can make an offer on a company after reviewing a CIM, speaking with the broker and seller (that is, our firm and you, the customer) and reviewing basic financials. It is actually post-LOI that most sophisticated financial buyers get in to the nitty gritty and decide if they actually do have a good business to purchase on their hands. Don’t be surprised if during due diligence that the terms of your deal change. Due diligence is also a busy time with a lot of communication and question-and-answer sessions. Having a good Miami M&A attorney and your CPA on call to help go through diligence is key. If the buyer finds mistakes in the financial records or recasting, or learns more about your key products or customers during this phase, they may ask for a change in the purchase price or the terms of the deal itself.
Recently, we worked with a client who was selling their industrial cleaning business in South Miami. After 20 years of profitability, the owner was ready to retire. We quickly took the company to market and got 3 acceptable offers. During due diligence with the top offer, the buyer realized a change in the accounting practices of the company in 2015 grossly overstated 2016’s net income, to the tune of $180,000. This meant that their original offer in the LOI was much too high, as the business was going for a 5x multiple. Our client was upset about seeing the purchase price re-negotiated down by $900,000, but it was a function of poor disclosure and record keeping.
Contact Our Team Today
With offices near Miami Beach and in Fort Lauderdale, our team is standing by to help you work through selling your small business. Give us a call today for an initial conversation.