3 Value-Wasting Mistakes to Avoid When Hiring a Professional Business Broker
And How to Achieve Success by Hiring the Right Business Broker for Selling Your Business
What This Report is About
Have you ever uncovered an opportunity you’d love jump into but found yourself too busy to make it happen?
It takes time, focus and talent to prepare, package, market and process a successful business sale…if you hope to achieve favorable results.
You may be tempted to hire away the problem, and if done right, leveraging OPT (Other People’s Talent) can be a real win. But, as you’ve probably heard, it can turn into a real bummer when the buyers don’t roll in, your business is “on the market” for an extended period or offer prices are low.
I wrote this guide to help you avoid three business sale-killing pitfalls of a bad relationship with a professional business broker… And how to get the most out of this most crucial partner in the sale of your business.
For instance, the choices made about how to position the business for sale, the listing price and marketing strategy to potential buyers can make or break a successful sale. You’ve worked hard building your business, developing customer and vendor relationships and generating profits, isn’t it worth careful consideration when choosing how to sell it?
Carefully identifying what parts of your company will be most valuable to a buyer, knowing how to determine the price and detailing how to “package” the business in a way that puts it in the best light and makes a strong appeal to prospective buyers are all critical but can be tricky!
If you are too busy running your current business to invest the time it takes to really focus on selling it, maybe it’s time to bring in a “hired gun” to help you realize (and maximize) the value you know is there.
But Jeez, you say…How do you do that without getting taken to the cleaners?
You don’t want to have all your hard work building your business go to waste.
But you also don’t want to go out and try to sell your business on your own while continuing to manage the business, work with buyers, negotiate the deal and oversee due diligence all while keeping everything confidential from employees and customers.
Relax, you can sell your business and realize the profits you deserve from leveraging a good business brokers talent to save you time and increase the chances of a successful sale, all while you focus on running your business. Or your life. Gee, what a concept!
The 3 Mistakes to Avoid…
Mistake #1: The Sellers Lens
We all have our own unique “lens” that we see the world through. This lens is not “fixed” but changes depending on the situation. As business leader Stephen Covey stated, “We must look at the lens through we see the world, as well as the world we see, and that the lens itself shapes how we interpret the world.”
This is true of how a buyer looks at your business…through a buyers lens, which is very different than a sellers lens.
Hiring somebody who doesn’t understand buyers and how to position your business so that buyers gets excited can result in little interest in your business. There are many small details that contribute to getting a buyer to look at your business.
Very often creating that buyer interest involves looking at your business from a fresh perspective and knowing how and what buyers look for. Success in selling a business is about taking the time to understand a business and then translating the opportunity so it is easily understood by buyers.
Look for a business broker who takes an active interest in the story of your business, asks lots of questions creates profiles of perfect buyers and has the ability to tell you what excites these kind of buyers.
Mistake #2: Thinking You Can Just Answer Some Questions, Send In Some Documents And Let Your Broker Handle It From There…
A trust must be established between you, the owner, and your business broker. This includes feeling comfortable about their personality, the way they communicate, their experience and approach used to sell your business.
The process of selling your business will most probably include some stressful periods and certainly there will be times when important decisions need to be made.
One of the benefits of working with a business broker is having someone involved in the process who you feel comfortable with candidly discussing your needs, desires, options, etc. This can help avoid broken transactions that result from your broker not taking the time to fully understand your perspective.
Mistake #3 – One Size (Does Not) Fit All
No two businesses are the same. Therefore, no two businesses should be sold the same way.
When discussing your business with a potential broker if you get the feeling they sell businesses pretty much the same way ask yourself “how is my business going to stand out from the 1,000’s of businesses for sale?”
The answer: “It won’t”
Ask your prospective broker to explain their approach to packaging and marketing businesses for sale. Look for a broker who doesn’t use the same approach for every business and understands the difference between simply putting together a generic write-up and financials versus creating a package that brings your business to life.
Every business is unique and every business should be sold with a customized approach. This is a little unconventional because it takes the broker extra time but can have a huge impact on your bottom line.
All the best!
~ Randy Hendershot
For more information…
To discover how Randy Hendershot can help you achieve the goal of selling your business and have fun in the process visit: EvoBizSales.com
Or call 916-993-5433 x5, email Randy@evobizsales.com
(Ask about a Business Valuation)
Read MoreAttract Buyers and Increase Value with the Story of Your Business
Every business has a Story. Much like a person, a business has a life of its own, separate from the story of the owner. It has a “birthday,” important people and events in its history, tales of successes and challenges, periods of growth and decline. Healthy, well-cared-for businesses can live for generations, while others quickly fade.
Essentially, the Story of a business is its heart and soul, the “life” that exists outside its financial bones.
Why the “Story” of a Business is so Important
So why is it so important for sellers to share the Story of their business with potential buyers?
Randy Hendershot, Co-Founder and Principal of Evolution Advisors, a leading Business Broker based in California, explains. He says, “Sellers put a lot of emphasis on the P&Ls, inventory, sales, and other numbers, but they often overlook the intangible aspects of a business. Because of that, they’re not capitalizing on all the business has to offer; they’re not presenting its complete value.”
To get a better idea of the importance of the Story, imagine a buyer, Bob, is looking to purchase a business. He’s narrowed it down to two possibilities, a manufacturing company in the city or a service business in a nearby town. Both look great on paper; each has strong profits and growth potential, a fair asking price, great location…
Now imagine you are the seller of the service business, and you tell Bob the Story of your business. That it’s known for outstanding customer relations, and the Internet site was recently upgraded to handle online requests. You tell him about how the most profitable division was created in 2002 by the sales manager who noticed customers lacking a complete solution to their problem. You share what it’s been like to run a prospering business with such a great group of loyal employees.
Now, when Bob is deciding which business to buy, he’s thinking about more than just the numbers. He’s imagining himself owning the service business, being an important person in the community. He’s thinking about what he could do to expand the most promising part of the business. He’s picturing working alongside dedicated employees who really care.
By sharing its Story, you’ve brought your business to life, while the manufacturing company Bob was considering remains a mundane business with no personality.
“Sellers can benefit greatly from telling the Story of their business,” says Mr. Hendershot. “It builds excitement. Buyers can see themselves running the business, becoming part of the Story. They’re more invested emotionally.”
Are There Dangers in Telling the Story of a Business?
But can telling the Story backfire? What about the “challenging” parts? Can knowing about the ups and downs, the hard times and challenges, actually hurt a sale?
Mr. Hendershot says it’s unlikely. “By putting all the cards on the table, the seller is actually doing potential buyers a favor. It builds trust and improves buyer confidence, all key elements in making a sale. I recommend anyone selling a business work with a business broker who knows how to tell, and sell, the Story. It’s that important.”
Read MoreWhen to Sell Your Business: Capitalizing on the Business Life Cycle
If you’re a business owner, you know the dream; buy or start a business, work hard to develop it, and watch it grow into something you’re proud of.
Then, once the business runs smoothly without your constant input or you’ve found someone you trust to manage it, you’ll finally be able to enjoy the freedom that comes with being your own boss! When you’re finally ready to retire or move on, you’ll sell your business and the profits from the sale will fund your retirement, provide a down payment on your next business purchase…
But there’s a problem with this way of thinking. By not taking into account the natural life cycle of a business, you can rob yourself of that nice payout…or even worse not be able to sell at all.
The Life Cycle of a Business
All businesses have a life cycle – they grow, mature, and eventually decline or re-invent themselves. How long this cycle takes depends on the structure of the company and the owner(s), but at some point all companies go through the following stages:
GROWTH STAGE: During the growth stage, the owner(s) are infusing the business with energy, ideas, and money. There are new procedures, products, and customers, and often new employees and suppliers. Profits start out low but keep rising, improving the value of the company.
MATURITY/STABILIZATION STAGE: This is where the owner(s), and the business, naturally reach a leveling-off point. The owner(s) have reached the limit of what they can do to grow the business. This can happen for any number of reasons: market saturation, competition, a changing customer base or sometimes simply the owner(s) wanting to work less. Whatever the cause, the maturity stage marks a period of stability and predictable day-to-day operations.
FORK IN THE ROAD: RE-POSITION OR DECLINE
DECLINE STAGE: The business enters a decline phase as the owner begins to back away from the business. This usually happens because they lose interest, start retirement, are burned out, face financial difficulty, or experience health issues. At this stage, when the business loses ground there’s no big effort to bring it back. No one is actively trying to recover lost customers or investing in updated equipment. After all, the plan is to sell, so why keep putting money into it?
OR….
RE-POSITION STAGE: If the owner has the energy, desire and capital they must think about the business as a “start-up”. The product/service, marketing and procedures are modified to meet the changing market conditions. The “former” business is history, the “new” business is now back in the Growth Stage…requiring a roll up the sleeves mentality. The thing that gets most businesses in trouble when they decide to go through the Re-Position stage is the difficulty in looking at the business with a fresh perspective (“hard to see the forest through the tree’s”).
Why Selling Your Business at the Wrong Time Devalues Your Business
As you can see from the above scenario, many business owners sell during the DECLINE phase, when the value is actually at its lowest! And while the owner still sees the worth of the business based on the work and money they invested in the past, a potential buyer only sees dropping sales, poor customer retention, and outdated equipment.
That’s why the longer it takes to finally make the sale, the more money you lose. Because once your business is in the decline phase, you’re faced with a difficult decision: selling it at a reduced price because it’s no longer a growing or stable business, or investing money and effort to “bring it up to speed” and make it more attractive to buyers. Either way, you pay (with time, money & energy).
How to Use the Business Life Cycle to Your Advantage
How do you avoid ending up in this difficult position? By selling your business when it’s at its prime (during the growth or maturity stage), or being prepared for the sale way ahead of time.
Many business owners have made enormous profits by selling their business in the growth stage (think start-ups that were acquired by major companies). You can also make a healthy profit from a mature business that’s showing consistent profits and stable operations.
If this sounds appealing to you and you’re comfortable selling your business at this stage, it’s wise to get the process started as soon as possible. Doing the groundwork early makes you prepared to accept a great opportunity or to sell quickly if your circumstances change (more on this in a future post).
If you’d rather be involved with your business right up until you retire, you can still see good profits as long as you plan ahead.
There are actually many ways you can run your business with transferred or shared ownership that lets you exit in stages rather than all at once. It requires planning well in advance, and understanding how to structure the deal but these options can let you retire at your own pace and still make a significant profit.
Whichever way you decide to go, knowing how to identify each stage of a businesses’ life cycle and pre-planning your exit strategy to meet your long-term needs are the keys to making sure you get back more from your business than you put into it.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
Read More
The Deal Is Almost Done — Or Is It?
The Letter of Intent has been signed by both buyer and seller and everything seems to be moving along just fine. It would seem that the deal is almost done. However, the due diligence process must now be completed. Due diligence is the process in which the buyer really decides to go forward with the deal, or, depending on what is discovered, to renegotiate the price – or even to withdraw from the deal. So, the deal may seem to be almost done, but it really isn’t – yet!
It is important that both sides to the transaction understand just what is going to take place in the due diligence process. The importance of the due diligence process cannot be underestimated. Stanley Foster Reed in his book, The Art of M&A, wrote, “The basic function of due diligence is to assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present, and predictable future of the business to be purchased.”
Prior to the due diligence process, buyers should assemble their experts to assist in this phase. These might include appraisers, accountants, lawyers, environmental experts, marketing personnel, etc. Many buyers fail to add an operational person familiar with the type of business under consideration. The legal and accounting side may be fine, but a good fix on the operations themselves is very important as a part of the due diligence process. After all, this is what the buyer is really buying.
Since the due diligence phase does involve both buyer and seller, here is a brief checklist of some of the main items for both parties to consider.
Industry Structure
Figure the percentage of sales by product line, review pricing policies, consider discount structure and product warranties; and if possible check against industry guidelines.
Human Resources
Review names, positions and responsibilities of the key management staff. Also, check the relationships, if appropriate, with labor, employee turnover, and incentive and bonus arrangements.
Marketing
Get a list of the major customers and arrive at a sales breakdown by region, and country, if exporting. Compare the company’s market share to the competition, if possible.
Operations
Review the current financial statements and compare to the budget. Check the incoming sales, analyze the backlog and the prospects for future sales.
Balance Sheet
Accounts receivables should be checked for aging, who’s paying and who isn’t, bad debt and the reserves. Inventory should be checked for work-in-process, finished goods along with turnover, non-usable inventory and the policy for returns and/or write-offs.
Environmental Issues
This is a new but quite complicated process. Ground contamination, ground water, lead paint and asbestos issues are all reasons for deals not closing, or at best not closing in a timely manner.
Manufacturing
This is where an operational expert can be invaluable. Does the facility work efficiently? How old and serviceable is the machinery and equipment? Is the technology still current? What is it really worth? Other areas, such as the manufacturing time by product, outsourcing in place, key suppliers – all of these should be checked.
Trademarks, Patents & Copyrights
Are these intangible assets transferable, and whose name are they in. If they are in an individual name – can they be transferred to the buyer? In today’s business world where intangible assets may be the backbone of the company, the deal is generally based on the satisfactory transfer of these assets.
Due diligence can determine whether the buyer goes through with the deal or begins a new round of negotiations. By completing the due diligence process, the buyer process insures, as far as possible, that the buyer is getting what he or she bargained for. The executed Letter of Intent is, in many ways, just the beginning.
Buying a Business – Some Key Consideration
- What’s for sale? What’s not for sale? Is real estate included? Is some of the machinery and/or equipment leased?
- Is there anything proprietary such as patents, copyrights or trademarks?
- Are there any barriers of entry? Is it capital, labor, intellectual property, personal relationships, location – or what?
- What is the company’s competitive advantage – special niche, great marketing, state-of-the-art manufacturing capability, well-known brands, etc.?
- Are there any assets not generating income and can they be sold?
- Are agreements in place with key employees and if not – why not?
- How can the business grow? Or, can it grow?
- Is the business dependent on the owner? Is there any depth to the management team?
- How is the financial reporting handled? Is it sufficient for the business? How does management utilize it?
Selling Your Business? Expect the Unexpected!
According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business. Great advice, but it rarely happens. Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes the business owner into selling. The business owner now becomes a seller without considering the unexpected issues that almost always occur. Here are some questions that need answering before selling:
How much is your time worth?
Business owners have a business to run, and they are generally the mainstay of the operation. If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle. Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price. Using the services of a business broker is a great time saver. In addition to all of the other duties they will handle, they will make sure that the owners meet only with qualified prospects and at a time convenient for the owner.
How involved do you need to be?
Some business owners feel that they need to know every detail of a buyer’s visit to the business. They want to be involved in this, and in every other detail of the process. This takes away from running the business. Owners must realize that prospective buyers assume that the business will continue to run successfully during the sales process and through the closing. Micromanaging the sales process takes time from the business. This is another reason to use the services of a business broker. They can handle the details of the selling process, and they will keep sellers informed every step of the way – leaving the owner with the time necessary to run the business. However, they are well aware that it is the seller’s business and that the seller makes the decisions.
Are there any other decision makers?
Sellers sometimes forget that they have a silent partner, or that they put their spouse’s name on the liquor license, or that they sold some stock to their brother-in-law in exchange for some operating capital. These part-owners might very well come out of the woodwork and create issues that can thwart a sale. A silent partner ceases to be silent and expects a much bigger slice of the pie than the seller is willing to give. The answer is for the seller to gather approvals of all the parties in writing prior to going to market.
How important is confidentiality?
This is always an important issue. Leaks can occur. The more active the selling process (which benefits the seller and greatly increases the chance of a higher price), the more likely the word will get out. Sellers should have a back-up plan in case confidentiality is breached. Business brokers are experienced in maintaining confidentiality and can be a big help in this area.
Do You Know Your Customers?
It’s always nice, when eating at a nice restaurant, for the owner to come up and ask how everything was. That personal contact goes a long way in keeping customers happy – and returning. It seems that customer service is now handled by making a potential customer or client wait on a telephone for what seems like forever, often forcing them to repeatedly listen to a recording saying that the call will be handled in 10 minutes. Small businesses are usually built around personal customer service. If you are a business owner, when is the last time you “worked the floor” or handled the phone, or had lunch with a good customer? Customers and clients like to do business with the owner. Even a friendly “hello” or “nice to see you again” goes a long way in customer relations and service.
The importance of knowing your customers and/or clients could actually be extended to suppliers, vendors, and others connected with your business. When is the last time you visited with your banker, accountant, or legal advisor? A friendly call to your biggest supplier(s) can go a long way in building relationships. A call to one of these people thanking them for prompt delivery can pay big dividends if and when a problem really develops. With most communication now done online, a handwritten thank you to a long-standing customer, someone whose recommendation resulted in a new customer, or a vendor you appreciate stands out among the bills and junk mail.
Owning and operating your own business is not a “backroom” or “hide behind the business plan” business. It is a “front-room” business. Go out and meet the customers – and anyone else who has an interest in your business.
Selling a Business: How Long Does It Take?
A recent survey revealed that the average time between listing and sale was 9 months.
Why does it take so long to sell a business? Price and terms are the biggest reasons. Not over-pricing the business at the beginning of the sales process is a big plus, as well as structuring the transaction to include a reasonable down payment with the seller carrying the balance. Having all of the necessary information right from the beginning can also greatly reduce the time period from listing to closing.
Being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is also key.
Here is the basic information that a prospective acquirer will want to review:
- Copies of the financials for the past three years.
- A copy of the lease and any assignments of the lease from previous sales.
- A list of the fixtures and equipment that will be included in the sale. Note: If something is not included, it is best to remove it prior to the sale or at least have a list of items not included.
- A copy of the franchise agreement if applicable or any agreements with suppliers or vendors.
- Copies of any other documentation pertaining to the business.
- Supporting documents for patents, copyrights, trademarks, etc.
- Sales brochures, press releases, advertisements, menus or other sales materials.
In addition, here are some of the questions that buyers may have. A prepared seller should have ready answers as well as the information to support them.
- Is the seller willing to train a new owner at no charge?
- Are there any zoning or local restrictions that would impact the business?
- Is there any pending litigation?
- Are any license issues involved?
- Are there any federal or state requirements, or environmental OSHA issues that could affect the business?
- What about the employee situation? Are there key employees?
- Are there any copyrights, secret recipes, mailing lists, etc?
- What about major suppliers or vendors?
A prepared seller is a willing seller, and having the answers to the above questions can significantly reduce the time it takes to sell a business. Using the services of a professional business broker can also greatly reduce the time period. They are knowledgeable about the current market, how to market a business and how to best advise a seller on price and terms. They can also recommend professional advisors, if a seller doesn’t have them already. Using advisors who are transaction-experienced can also shorten the time it takes to close the sale.
Read MoreTaking Out a Lease: Don’t Get Stung by Buried Obligations
By Nancy A. Park
When business owners prepare to sign a lease to move into a new space, they worry most about the rent amount, location and the disruption to business from moving. However, a lease is one of the most important contracts a business owner will sign, because it is often a long-term financial obligation that can either be a boon, benefit or an expensive blunder. When presented with a lease, business owners should avoid the inclination to just sign on the bottom line after checking the rent amount, term and address. Take the time to read the entire lease to avoid the blunders hidden in the fine print. Otherwise, you may get stung by unintended charges or costly repairs.
Be sure to start your search for a new business space with a knowledgeable real estate broker who can find the best deal for a space that suits your business needs. Your broker also can help you be realistic about the market before you sign an overpriced lease that puts you underwater. Your broker will help you enter into a non-binding letter of intent that summarizes the key terms such as rent, term, and who pays for expenses, as well as any improvements to be made to the new space.
While the length of the lease can be intimidating, reading the fine print will pinpoint the areas that contain hidden expenses. Almost every lease issue boils down to expenses that either the tenant or landlord must pay. Be sure that you only pay the expenses you have bargained for, and no more. If you miss the key issues, you may be presented with a huge expense invoice in the first month, be faced with large repair bills because of deferred maintenance, or pay additional expenses every month for services you thought were included in the rent. One caveat: If the lease is short and sweet, rather than thanking your lucky stars, look for important terms that may not be included.
Here are the top five areas to be aware of when reviewing that mind-numbing lease:
1. Check the facts: Are all the key terms from the letter of intent or other summary of terms included in the lease and are they correct? Often some terms are left out, misstated or changed. If so, ask why and request a correction. Double check the math on rent and lease term, and verify that the dates are realistic for move-in and payment of rent. Usually rent does not begin before moving in.
2. Expenses: There are usually several sections that deal with expenses, and what is or isn’t included in rent. The lease should clearly state who is paying for utilities, janitorial, landscaping, taxes, repairs and tenant improvements. Be sure each expense that is included in the rent or paid by the landlord is clearly noted. If there are agreed upon limits on certain expenses, be sure these are noted. Any verbal agreement should be included in the lease.
3. Compliance with Laws: Most buildings aren’t brand new when you move in, and often laws have changed since the space and/or building was constructed. Who is responsible for bringing the space, the lobby area and/or building into compliance if the laws have changed or when future laws change? As a tenant, you should not have to pay for this expense or, if at all, the large expense should be amortized (spread out) over many years, like 15 or 30 years. You want to encourage the landlord to bring your building into compliance with laws, as these could be important safety items like fire sprinklers or handicapped access, but not foot the bill in one month.
4. Building Systems and Premises: All the heating, air conditioning, ventilation and electrical systems of the building and space should be in good working order and in compliance with all laws at the start date of the lease, and the lease should reflect this fact. If a landlord is not willing to state this fact, then you need to ask why not and who will pay for it to bring it to acceptable condition. If you have negotiated that this is your expense, be sure you (or your friendly HVAC service person) have a chance to inspect and test these systems so you know what the dollar exposure might be. These can be significant costs, so beware.
5. Repairs and Maintenance: Be sure you know who must actually call the repair company, and who pays for repairs if breakdowns occur. Often the landlord is responsible to make the call and contract for repairs, but passes the expense through to tenant to pay. The arrangement on this issue should be very clearly stated, as well as your remedy if a landlord fails to make repairs, such as a right to repair and deduct from rent, or notice to landlord.
With a careful eye to the issues, you can avoid the painful sting of unexpected expenses. There is, of course, no substitute for a concise legal review by a knowledgeable real estate attorney familiar with the usual and customary terms and compromises.
About the Author
Nancy A. Park is of counsel at Best Best & Krieger LLP in the Sacramento office where she works with clients in both the private and public sector, focusing on real estate transactions, finance and business contracts. Ms. Park represents private and public real estate entities, lenders and
borrowers, landlords and tenants, and large and small businesses.
She can be reached at nancy.park@bbklaw.com or 916-551-2849.
Beware of the Top 5 “Gotchas” When Taking Out Business Loans
By Nancy A. Park
Business owners are often so worried about money and obtaining enough of it to capitalize their businesses that by the time the loan documents arrive, they are ready to sign on the dotted line and be done with it. However, this is a crucial time to step back and make sure that what you are signing up for is what you bargained for. Otherwise, you might find yourself and your business hampered by so many bank consent requirements that you can’t operate your
business effectively. Or worse, you default on your loan without realizing it and there is no way to pay it when the bank calls it due early.
Loan documents are often a tall stack of long, boring and finely printed contracts with lots of boilerplate language. The dirty little secret of loan documents is that the “gotchas” are hidden in this so-called boilerplate. Have your summary of terms (or letter of interest) from the bank right next to you as you read the loan documents from beginning to end.
Then focus on the following five areas to prevent the mistakes borrowers most often make.
1. Check the facts: Is the borrower’s name and entity correct? At a minimum, check loan term (maturity), interest rate, names, payment amount, amortization, addresses and collateral description. Make sure references to interest rate, loan term, payments and other key loan terms match up with your summary of terms. Are the right properties or fixtures being included as collateral? Pay particular attention to “financial covenants,” such as maintaining a certain net worth or cash balances or ratios, and the timing of financial reporting. Be sure that the loan documents give your business time to cure problems if these requirements are not met during the loan term.
2. Review the possible defaults: There might be several places in the documents that list loan defaults, such as failure to pay by a certain time or failure to perform other loan terms. If any of the defaults seem like a real risk (now or during the loan term), then you should discuss this with your banker so you
are not backed into a corner from day one. Ask for a cure period for every default, and avoid having the loan declared due as the first remedy by the bank. Some common events leading to default are failure to pay, death of a key person in the business, or sale of the business or its major assets.
3. Representations and Warranties: Borrowers are usually asked to make numerous statements of facts or beliefs in the loan documents, called representations and warranties. Some of these can be very broad or include facts that the borrower may not actually know. It is important that you read carefully and feel comfortable that each statement is correct and within your knowledge. It is OK in many instances to limit these statements to the best of the borrower’s (your) knowledge.
4. Loan or Credit Agreements: One important loan document is a loan or credit agreement that contains the loan terms specific to your operations. Ensure the bank has not tied your hands with regard to your main line of business, such as prohibiting certain contracts or transactions. Often banks require their consent before allowing certain actions to occur. Be sure that key business activities are not restricted, or you have authority to act up to a certain limit before the consent of the bank is required. Ideally, the bank will have no say in key business decisions, but if it does, require the bank to act within certain time frame so it will not handicap your business activities.
5. Check for Other Terms: If something seems odd or overly restrictive, now is the time to get these things explained in plain language by your banker. Don’t be put off with phrases like “That’s just what the loan docs say, it never really happens that way.” Loan documents are enforced by the actual language that is included. It is extremely important that you understand everything and correct any inaccuracies. If the banker is not able to explain certain issues or change loan terms, then you will need to weigh the risk of this issue occurring against your need for the loan.
You may think that the loan docs are just a necessary evil that should be accepted the way they are to reach the end goal of cash. However, there is no substitute for actually reading all of your loan documents and understanding the actual terms. Even better, allow a lawyer knowledgeable with the customary compromises agreed to by banks and borrowers to give your loan documents a careful legal review before signing on the dotted line.
Nancy A. Park is of counsel at Best Best & Krieger LLP in the Sacramento office where she works with clients in both the private and public sector, focusing on real estate transactions, finance and business contracts. Ms. Park represents private and public real estate entities, lenders and borrowers, landlords and tenants, and large and small businesses. She can be reached at nancy.park@bbklaw.com or 916-551-2849.
Read MoreThree Basic Factors of Earnings
Two businesses for sale could report the same numeric value for “earnings” and yet be far from equal. Three factors of earnings are listed below that tell more about the earnings than just the number.
1. Quality of earnings
Quality of earnings measures whether the earnings are padded with a lot of “add backs” or one-time events, such as a sale of real estate, resulting in an earnings figure which does not accurately reflect the true earning power of the company’s operations. It is not unusual for companies to have “some” non-recurring expenses every year, whether for a new roof on the plant, a hefty lawsuit, a write-down of inventory, etc. Beware of the business appraiser that restructures the earnings without “any” allowances for extraordinary items.
2. Sustainability of earnings after the acquisition
The key question a buyer often considers is whether he or she is acquiring a company at the apex of its business cycle or if the earnings will continue to grow at the previous rate.
3. Verification of information
The concern for the buyer is whether the information is accurate, timely, and relatively unbiased. Has the company allowed for possible product returns or allowed for uncollectable receivables? Is the seller above-board, or are there skeletons in the closet?
