Cashing Out -Part 2- Common Mistakes made by Seller's in the sale of their small business.

[Stacy L. Alario, FCBI]

Some of the more common mistakes made by sellers in the sale of their businesses are because they do not completely understand what gives value to their company. Most closely-held business owners have purposefully suppressed their profits to reduce tax exposure; therefore the company's financial statements and tax returns do not begin to reflect the true earnings of the business. A professionally trained business broker will prepare documentation from these records reflecting the true cash flow," seller's discretionary earnings," or in simple terms, the spendable income on a free and clear basis.

In addition, some sellers have an unrealistic expectation in their minds of their asking price. What they would "like" to sell the business for may not be its true worth or realistic value. Frequently, they are unwilling to offer seller-financing, and with the tax saving strategies they have been using, bank financing is usually not an option. Even in good economic times this is so. Although many businesses will not qualify for institutional financing, they are still excellent opportunities for buyers. A seller's willingness to offer terms gives more buyers the opportunity to purchase the company. Further, the attitude of some buyers is if the seller is not willing to offer some financing, it may be an indication the seller is not sufficiently confident in the business, or the continued success of the buyer. This attitude is likely to scare off a good prospect.

Some of the advantages a seller gains by offering financing are that they in most cases, will receive more proceeds when adding in the interest payments on the note. It is like an annuity stream for the seller, a desired money management tool for many. There are often tax advantages for the seller (see your CPA) by deferring income. In many cases, it creates a full security and collateral for the seller. It can avoid subordinated financing. Typically, all cash transactions are discounted greatly. Often these discounts are up to 50-60% when the seller demands all cash. Sellers have the ability to sell these notes later on the secondary market, if desired. The length of time to facilitate a sale is many times shortened when there is one less hurdle (third party) involved. Seller financing also shows agents and brokers who the motivated and realistic sellers are. Offering terms can make a border line or distressed business or company saleable. This is more than ever prevalent with today's economic challenges most small business owners are facing daily.

Another seller mistake is often the buyer's motivation is not considered or understood. Too much emphasis is placed on past performance rather than present and future growth potential. A major problem is when a seller fails to reveal problems. When a seller in not up-front about problems of the business, this does not mean the problems will go away. They are bound to turn up later, usually sometime after a tentative agreement has been reached. When these hidden "surprises" occur, and they will...it will in most cases drastically change the agreement or worst case scenario, kill the potential sale. Sellers must be as open and honest about the minuses of their business as they are the pluses.

Stacy L. Alario, FCBI and American Business Brokerage have been helping seller's highlight their pluses and handle the minuses of their business since 1979. Please call us for a confidential appointment to discuss your succession planning. [phone]
www.americanbusinessbrokerage.org