Why A Partnership?

There are two primary reasons why one should have a partner. Either you need someone to share the work load or you need someone to share the cost and the investment until your business is running profitably. All other reasons are secondary.A few other reasons people use to justify having partners are: emotional and psychological reinforcement, different or complementary skill sets, scalability, trust, fun, dependability, sharing the risk, sharing authority, and time off. There are still more creative reasons many people think of to have or want a partner but each one of these really comes back to sharing the work load or sharing the cost.

More…Partnerships are complex and intense relationships not unlike marriages. Successful partners control their emotions, resolve conflicts, and quickly learn they must compromise to thrive and survive. In most cases, close personal relationships with either friends or family members who become partners are generally compromised by the stress and difficulty involved in making serious business and financial decisions.

If partners are fortunate, their previous social relationships with each other are compromised only a little but unfortunately this is seldom the case. If possible, serious consideration when selecting a partner should be given to respected business associates or business acquaintances instead of family members or close friends.

Two is company, three is a crowd. This is an old adage that may be particularly apropos to partnerships and should be heeded indeed. With three partners, the potential for ongoing conflict increases unless one partner has a controlling interest. Often times, due to personality, philosophical, or business differences the same two partners may consistently team up to outvote the remaining partner. Two equal partners by definition generally work towards compromise and finding workable solutions with one another because the alternative may cause the business or the partnership to fail.

No matter who your partner or partners are, certain safeguards and best business practices should to be closely considered and adhered to in order to better avoid potential catastrophic conflicts.

• Have a sound and detailed business plan that also defines each partners responsibilities
• Agree on a mechanism for mediation or a plan to break a voting deadlock
• Have a buyout formula or plan of action in the event of death, major illness, dispute, and the like, such as life and disability insurance.
• Agree on a mechanism to dissolve the partnership if necessary

In order for business partnerships to succeed partners must be committed to working together as a team with a common focus and a common goal as well as sharing mutual dedication to achieving success. It is wise to understand and consider the career background of each prospective partner. Consider whether they have experience working in teams where success was achieved, which may indicate having experience with conflict resolution.

Were they independent achievers and given autonomy and freedom in previous jobs where only results counted? Do not overlook past performance as an important indicator. As a wise man once said “those of us who ignore the lessons of history are doomed to repeat the failures of the past.”

Partnerships are teams and therefore conflict is inevitable. Those who prepare for and are able to successfully bridge conflicts have the best chance of realizing successful, harmonious and profitable partnerships.

Key Points in Determining How Saleable Your Business May be

What are you doing to build value in your business?

Do you delegate authority to key employees?

Is your business scalable?

Is your business sustainable without you?

If your answers are not much, no, no, and no respectively then your business may have very little if any resale value beyond liquidation of its assets. However, with a little foresight and by adhering to a few simple good business practices you can easily build equity and value in your business.

Building value – make sure your products, inventory, services, timeliness in filling orders, record keeping, and technology meet the changing and evolving needs of your customers and clients and keep up with the current trends in your industry. Maintain proper margins, production, and output in order to assure profitability. As technology evolves, changes, and dazzles us, it is important to implement the software, hardware, websites, databases, and customer relationship management systems that will enable you expedite the delivery of your products and services. This will also create the perception that your business is at the forefront of its industry regardless of the size of the business.

Delegating authority to key employees is a must. Whether a strategic (company) buyer or an individual buyer considers purchasing your business they will immediately look at and quickly determine if other employees have the necessary personal relationships with your key customers and clients in order to assure the continuation of these accounts once the owner is gone. Critical functions such as the delegating of job costing, estimating, customer and client relationship building all play an important part in the buying decision of a qualified purchaser when considering an acquisition of your business.

Is your business scalable? Can the scope of your products and services expand with your existing personnel, space, systems, and technology? If not, develop a written plan as to what improvements, upgrades, and personnel expansion are necessary to grow your business. This will minimize the guess work and ease the concerns of prospective buyers who will likely think more of you and of your business if such a plan is presented in writing.

Is your business sustainable without you? If you are a sole practitioner – lawyer, doctor, dentist, consultant, etc. this is a particularly difficult issue. If you have a retail, service, or distribution business employing others, it is imperative that you delegate as much responsibility to as many different subordinates as you can.

Following these tips as you grow and operate your business will dramatically increase your chances of eventually selling your business and obtaining the best possible value for it.

Lease Guarantees

Every landlord prefers to have the full term of their premise lease personally guaranteed by the prospective buyer of the business or by a prospective new tenant. It has surprised me over my thirty-five plus years spanning my careers both as a business owner of as many as ten retail and service facilities at one time and in business and real estate brokerage how some lawyers who may only occasionally deal in business and real estate transactions on behalf of their clients do not realize there may be good and acceptable alternatives that may be negotiated with a landlord.


Let’s examine a lease term of ten years where the landlord requests a personal guarantee by the prospective business buyer or tenant and requires a spousal guarantee as is quite common. There are several responses to this, yes, no, maybe, and yes but. Yes but may be a winner.

The following are a several scenarios that I have successfully negotiated over the years on behalf of my clients. Let me not forgot to mention that I hold four real estate brokers licenses, one each in the State of Maryland, The Commonwealth of Virginia, The State of Delaware, and The District of Columbia.

• 3 year personal guarantee with no personal guarantee on the remaining term
• A rolling one year guarantee whereby at any point in time where the tenant gives notice to vacate to the landlord than the tenant will be liable for one more year from the date of notice
• Or as in a deal I have closing very soon and in spite of the fact that the seller has been in this 5,000 square foot space for 32 years with full personal guarantees the landlord has just agreed to our proposal for a ten year lease with a $100,000 maximum personal guarantee from the date of notice to vacate by the new business owner / tenant.

In other words, be creative. Just because a landlord emphatically states or writes that they require a full guarantee with a spousal guarantee with a shorter lease term than you want this should not preclude you, your broker, or your attorney from making a written counter offer with terms and conditions that may be more favorable to you. The key is being flexible, creative and be willing to compromise and often times you will lessen your lease liability and obtain better terms than you may have expected.

Navigating the Sales Transaction

When a Seller hires me or my company to represent him or her in the sale of their business, successfully navigating the business sales transaction generally involves a seven step process from the start of the process to a successful sale and to the close of the transaction.

1. Gathering information to learn about their business
2. Prepare an assessment or a valuation to determine its value
3. Develop an outline or a goal as to what transaction structure will be most beneficial to the Seller consulting with the Seller’s other advisors as necessary
4. Prepare a marketing package, advertise and prospect, and identify qualified buyers
5. Either write or help facilitate a term sheet, letter of intent, or purchase agreement and negotiate on behalf of the Seller
6. Traction may be gained or lost during due diligence and we make sure that documents are delivered and reviewed in a timely manner
7. Bring Buyers and Sellers and their respective lawyers together to successfully close the transaction

More…1. Gathering information is a critical first step in learning about a business and being able to present in a positive and customary manner and also in a format that is consistent with generally accepted accounting principles (GAAP). Depending on the size and type of the business much of the following information may be requested of the seller:

• Accts Payable Report
• Accts Receivable Schedule & Aging Report
• Business Hours
• Certificate of Good Standing
• Company Organizational Chart
• Company Write Up
• Contracts to which the Business is a Party
• Corporate Charter & By-laws
• Corporate Minutes Books w/updated Minutes
• Customer Information Profile
• Detailed Depreciation Schedules Listing Each Fixed Asset Owned
• Employee Benefit Plans
• Employee Retirement Plans
• Equipment & Vehicles Leases
• Existing Financing Notes
• Financial Statements: 3 yrs & year-to-date
• Franchise Agreements
• Labor/Employee Contracts
• Licenses, Registrations for Patents, Copyrights, trademarks, etc.
• List of Equipment & Vehicles
• Listing Information Questionnaire to be Completed by Seller
• Marketing Package
• Monthly Sales Tax Records
• Other Agreements
• Payroll Information including description of each employee’s position, key man info, number of hours worked each week, and hourly wage or salary:
• Payroll Quarterly Summary Reports
• Premise Lease
• Summary of Insurance Coverage
• Tax Returns: 3 years
• Valuations & Appraisals
• Value of Inventory
• Website Domain URL and Other Domain URL’s

If there is also real estate involved:

• Plat
• Real Estate Appraisals
• Real Tax Assessment Notice
• Real Estate Tax Bill

2. We prepare an assessment or a valuation to determine the value of the business by utilizing the detailed financial information supplied by the Seller. We use the following tools or methods to determine the fair market value of the business.

• Valuation software
• Industry standard multiples of earnings or of gross revenue
• Comparables obtained from national done deal databases when available
• Valuation of tangible assets including special equipment, tangible assets and any other assets of unusual value

3. Develop an outline or a goal as to what transaction structure will be most beneficial to the Seller consulting with the Seller’s other advisors as necessary.

• A target plan may minimize the Seller’s tax liability
• Depending on the Seller’s needs they may want to maximize or minimize the cash down-payment
• A monthly payout for a shorter or a longer term may be preferable in order to provide set payments with interest to maximize the long term value of the transaction

4. We prepare a marketing package, advertise and prospect, and identify qualified buyers. This stage generally takes the greatest amount of time. We put together a marketing package usually in the form of an offering prospectus which is commonly known as a Confidential Business Review (CBR) in the business brokerage profession.

• Compose a CBR
• Identify markets and target different types of buyers

* Individual
* Strategic
* Synergistic
* Industry
* Financial

• Market and prospect

* Letter writing
* Advertising
* National websites
* Various paper and online publications as is appropriate

• Endeavor to attract multiple qualified prospects

5. We either write or help facilitate a term sheet, letter of intent, or purchase agreement and negotiate on behalf of the Seller. This involves skilled negotiations and problem solving abilities honed during our many years in the profession both through academic training and hands on experience.

• We represent the Seller during the entire process and will skillfully negotiate to protect the Seller’s interests and are careful not to lose the deal
• Ultimately the best deals result in a win-win situation for both parties

6. Traction may be gained or lost during due diligence and we make sure documents are delivered and reviewed in a timely manner. This may be the most critical stage and is where deals are often confirmed or lost.

• We aggressively facilitate and pay close attention to deadlines for delivery by the Seller and timelines for review of documents by the Buyer
• We effectively resolve or mitigate questions and conflicts that generally will arise
• We often participate with lenders and work with Buyers and Sellers in satisfying underwriting requirements
• Landlord or real estate requirements are facilitated and / or negotiated by us

7. We bring Buyers and Sellers and their respective lawyers together to successfully close the transaction. After due diligence is completed we make sure important loose ends are tidied up to help assure closing will take place as scheduled.

• Cash adjustments include payroll, utilities, insurance, personal property tax, etc.
• Agreements concerning cut-offs for cash receivable may be of critical importance
• Trade license transfers need to take place or be applied for
• Final landlord approval and documentation must be provided

Using a skilled and experienced business broker or business intermediary like myself dramatically increases the chances of successfully navigating the transaction process and of maximizing the value a Seller will realize from the sale of his or her business.

Selecting a Broker to Sell Your Business

Once a decision is made to sell your business selecting a professional business broker or a business intermediary to broker the sale of your business is the next step.

The terms business broker and business intermediary are sometimes synonymous but generally imply a different level of expertise and differences in their typical transaction values. Frequently, the term business broker refers to those who almost exclusively sell businesses with transaction values of $500,000 or less, also known as main-street businesses. The term business intermediary is frequently used by brokers who usually sell businesses in the range of $500,000 to $10,000,000 and are otherwise known as upper main-street to lower mid-market businesses. Often times, the two do overlap. For simplicity I will use the single term, business broker.

More…Merger and acquisition (M & A) intermediaries usually refer to intermediaries who broker either independently, in teams, or for major brokerage firms, transactions with a minimum value of $10,000,000 and often times for far greater amounts and may include public companies as well.

A great way to get started in selecting an appropriate business broker is by browsing the local business brokers association’s website and scrolling through the list of brokers by geographical area or alphabetically by name. You will generally see the individual brokers’ industry designations posted there as well. The Mid-Atlantic Business Intermediaries Association at www.mabia.org serves our large region. Also, see the International Business Brokers Association website at www.Ibba.org and select your state and browse though the alphabetical listing of brokers by city.

Check with professionals you may know including lawyers, accountants, financial advisors, and so forth for recommendations for business brokers.

There are approximately 20 states in the United States that require some sort of licensing for business brokers and none of those are in the Mid-Atlantic region. This makes the selection and qualification of a broker more difficult and even more important.

The following are key qualifications and points that should be carefully considered in selecting a business broker:

• Years in the business brokerage profession – not to be confused with real estate brokerage experience
• Approximate number of business transactions
• Range of transaction values and industry types
• Industry certifications (especially as a Certified Business Intermediary – CBI)
• Member of local business brokers association and the International Business Broker Association (full time business brokers usually belong to both)
• Real estate licensure
• Company brochures and the content and quality thereof
• Website – appearance and quality
• Personal appearance and attire
• Demeanor and presence
• Computer skills – much of the communicating with and screening of buyers is done today via e-mail as well as advertising on national business for sale websites
• Venues for advertising – should include national websites
• Co-op with other business brokers – most business brokers do not, it is generally to the advantage of the seller if the broker will cooperate with other qualified business brokers
• Assurance of discretion and confidentiality
• References

Most of the bulleted points are self explanatory. One should note, however, that any business broker you may consider hiring to represent you should be a licensed real estate agent or real estate broker in the state your business is located in even if there is no real estate involved in your transaction. This provides you with a possible legal avenue for recourse against the business broker in the event of his or her negligence.

Often times a business broker who has a real estate license is held to the same standard of behavior and potential liability as are other licensed real estate agents or brokers. As an example, in the State of Maryland an individual may file a claim against a business broker who has a real estate license and may be awarded up to $25,000 in damages by the Maryland Real Estate Guaranty Fund.

A business broker with the CBI designation and with at least five years experience should be adept at reviewing, analyzing, and normalizing (recasting) your business financial statements and / or tax returns. He or she should have valuation software programs, industry standard valuation formulas, and access to national done deal databases for comparables.

Establishing the fair market value of the business in addition to developing and implementing a sound and comprehensive marketing strategy are skills the business broker should possess and be able to demonstrate in order to give you the best chance of obtaining the highest value for your business.

Consider what you are entrusting the broker with and expect them to be as professional as your own lawyer or CPA may be. Settle for nothing less than the best!

Why a Business Advisory Service is a Wise Investment

With increasing frequency buyers are hiring me to help them evaluate prospective businesses they are seriously considering purchasing. Sometimes, they identify opportunities by themselves and other times they correctly recognize that the business broker or intermediary who has listed the business is working for and being paid by the Seller and therefore only represents the interests of the seller.

More…Recently a prospective buyer, whom I will refer to as Mr. Jones hired me to help him evaluate a business opportunity involving a service franchise. He was considering buying a new franchise but a sale of an existing franchise became available on Rockville Pike in Montgomery County, Maryland. The franchisor put him in direct contact with the owner of the Rockville Pike store and the owner provided Mr. Jones with the necessary financial documents and even provided a sales contract from a previous failed deal to use as a template for a new deal.

Mr. Jones was quite excited by this opportunity but since it was a business he was unfamiliar with he approached me about providing an objective analysis of this business acquisition opportunity. When we met, I reviewed the lease and the last three years and the current year-to-date financials statements of the business.

I pointed out to Mr. Jones that although Rockville Pike is the most heavily traveled road through retail and commercial areas in the State of Maryland that particular portion of Rockville Pike was slightly north of the areas that are historically more likely to foster small business growth. This, I knew to be true from my past years of experience in retail and commercial leasing.

When reviewing the financial statements and after looking closely at the trend of the monthly sales over the past three years, I noticed a recent quarter where sales dropped precipitously. Mr. Jones to this point had only looked at the year-end figures and had not noticed the drop in revenue during this recent quarter. When I identified this alarming trend to Mr. Jones, we discussed this is some detail.

Turns out, the store manager had quit just prior to the drop in sales and Mr. Jones said he intended to be a hands-on owner/operator. Since the business had been absentee owned, Mr. Jones felt reasonably certain that his personality, managerial skills, and mathematics background would make all the difference and sales would not only return to their former levels but sales were likely to grow as well.

I suggested the more likely scenario was when the previous manager quit, the service contracts or implied contracts and many customer contacts left with him. In the interim, the primary remaining employee who performed the skilled work was acting as the store manager as well.

In our discussions, I pointed out to Mr. Jones, there was little likelihood of the previous lost business returning, he may be too beholding to the remaining employee, and the position of this store front on Rockville Pike was historically poor for small businesses. I felt the price Mr. Jones was offering appeared to be a good value for him based on the annual statements but in view of the recent drop in revenue I suggested he offer substantially less.

Mr. Jones was grateful for my analysis and left considerably more somber than when he arrived. Later in the day I received the following e-mail from him.

“Thank YOU! Our visit today was a real eye-opener for me, and I’m glad I met with you.

In order for our meeting to have taken place, two fortuitous things had to happen: My wife saw an article in Entrepreneur on-line on how to buy a business, and I happened to have come upon the concept of a business buyer broker in that article. That led me to look for such a person for us, and we’re glad we found you.

Based on what I found out today from you, we probably will not buy the existing business in Rockville, but rather start our own store elsewhere. Perhaps purchasing this store IS a great opportunity, but we’re too risk-averse at this point to try it.

We will certainly contact you if we have any other professional questions, and in any event will let you know what comes of our dealings with this franchise.

Thanks again for your help today.”

No Offer is Good Enough: A Common Fallacy

Some business owners feel no reasonable offer is enough to entice them to sell their business. Some, especially those who founded, built, nurtured, and grew their businesses may fall into this category. They probably invested most of their capital to launch their business and worked long and hard hours and have more sweat equity invested than anyone but their spouses and families would believe. Certainly, this and all the customers who have for years patronized their business must translate to a huge amount of goodwill and increased value and price for their business.

More…In a word, NO! The factors mentioned above have little bearing on the value of a business. Small businesses are valued by assessing the earnings of the business, known as net cash flow or seller’s discretionary earnings (SDE). Critical consideration is given to the performance of the business over the past three years.

The market value of a business is generally determined by multiples of SDE. Sometimes these multiples are based on ratios common to a specific industry or are based on average multiples for businesses in the same size and revenue range. Other times, market value is based on an industry factor that divides into gross revenues.

Risk assessment, efficiencies, trends and most importantly the likelihood of a continued income stream and earnings from the business are the determining factors as to whether a buyer will even submit a purchase offer. The amount of money a buyer will agree to pay for a business beyond the tangible or hard assets of a business is the intangible part. This is usually allocated to the covenant-not-to-complete and to goodwill. Usually, a multiple of SDE or a factor of gross revenue less the value of normal trade fixtures, furniture, and equipment is what determines the value of the goodwill and a portion of that value are assigned to the covenant-not-to-complete.

Recently, I gave a presentation before a Business Network International (BNI) Chapter regarding the need to inform and educate sellers as to the factors that realistically impact and determine the value of their businesses. When I meet with first generation owners who have built their businesses from inception and who have owned their businesses for many years and who may be nearing retirement age I assume they will have a much higher expectation of the value of their business than the market will realistically bear.

Often times such sellers refuse to acknowledge and accept the reality of the market. This may result in the listing price being so unrealistically high that prospective buyers are turned off and don’t consider an overpriced business to be a viable or serious opportunity. Lowering the price will not likely win back serious, qualified, and knowledgeable prospects.

Ultimately, the owners may receive far less for their businesses when they finally do decide to sell. They may be forced to sell due to compelling reasons like ill health, divorce, partnership breakup, or the passing away of a principal. This may even result in eventual liquidation of the business assets and closing the doors. Instead of properly preparing and marketing their businesses within sensible and justifiable parameters, the leverage and appeal they may have had is lost in the urgency of their pressing need to sell.

How to Prepare Your Business for Maximum Sale Price

Business owners should take a critical look at their business at least two years before they intend to put it on the market. It is best to try to view the business as you think a buyer would and identify the pros and cons of the business. Consider the following elements: operations, facilities, competition, clients and customers, management and key employees, market share, technology, websites, and growth opportunities. It may be prudent to hire an independent consultant to help with this analysis.

More…Identifying problem areas within a business and taking corrective action are often the keys to maximizing the value of a business. Most closely held small businesses have annual revenues of five million dollars or less. Such small businesses are typically run and managed by owner / operators who make most of the important decisions in their businesses. The owners are often successful, take charge, non-delegating types who may have nurtured and grown their businesses from inception. These are some of the same characteristics that may have to be mitigated in order to increase the ultimate value of their businesses.

Spruce up the facilities, stay current and abreast of your products and services, know the practices of your competition and follow industry trends. Pay close attention to payroll with a sharp eye on minimizing overtime and bloated salaries.

One of the most common problems in service businesses in particular is the owner often does most if not all of the job pricing and is reluctant to delegate this critical function to others. It is easy to understand how customer relations may have grown over the years and certain dynamics between the customer and the owner may play or have played a part in winning the customer’s business.

Smart owners train and delegate pricing and estimating to others or he or she runs the risk of being thought of, as “the business”. Even better, is to invest in technology and utilize industry software estimating programs.

Remember, tacit knowledge is what is in someone’s head, usually the owner’s and explicit knowledge is what is written down and easily transfers. Software programs, manuals, and written policies are all examples of explicit knowledge. Buyers will gladly pay for explicit knowledge and rightfully assess higher risk and therefore lower value to tacit knowledge. There may be a huge amount of tacit knowledge in the head of the seller but if he can’t shake it out and transfer it, what value is it to a buyer? Obviously, not much!

Another area of importance is the accounts receivable aging report. Some long time customers may over the years have turned into slow paying customers. For obvious reasons, business owners may have looked the other way and over time a slow paying trend may have turned into a pattern of habitual lateness in paying bills. This is often as much the fault of the business owner for allowing unusually liberal payment terms as it is of the customers or clients who grew dependent on taking advantage of what may have originally been intended as an accommodation or as a courtesy during hard times.

Most buyers, large or small, strategic or individual will discount one hundred percent annual revenue from any clients or customers who have regular track records of paying their bills beyond ninety days. Buyers have to obtain increased lines of credit to carry these slow bill payers and they understand that as new owners, if they insist on having these clients and customers conform to tighter payment terms they may lose them to competitors.

Sellers significantly enhance the value of their businesses by having all of their clients and customers pay their bills in a timely manner. All bills should be paid within ninety days of delivery or of service.

Following these steps dramatically increases the chances of maximizing the value of your business and you will reap the rewards!