Do you know what a business broker is and how could they help you if you are looking to sell your business? What are the different ways to sell a business? What is the sale process of a business?
In this podcast episode, Alison Pidgeon speaks with Frank Arcoleo on how to sell your business and some mistakes to avoid.
Meet Frank Arcoleo
Frank Arcoleo is a member of A Neumann & Associates, a full-service Mergers & Acquisitions Advisor to small business owners, generally businesses with $1 – $100 million in revenues. Frank has been in the M&A field for about 8 years.
Prior to that, he was a management consultant for KPMG and other national and regional consulting firms in the NY metropolitan area, then as an independent consultant. Frank is a Louisiana CPA and has earned an MBA in Management from the Wharton School of the University of Pennsylvania.
Visit Frank’s website or email him at email@example.com
In This Podcast
- Definition of a business broker
- What business owners can do in order to prepare their business for sale
- Business evaluation and the aspects involved
- Some ways to sell a business
- Non-disclosure agreement
- Advantages and disadvantages of buying an existing group practice vs starting your own
- Mistakes that business owners make when buying and selling
- The sale process of a business
Definition of a business broker
We put buyers and sellers together and get an agreement so that the deal can take place.
- Work with small business owners to prepare the business in order to sell from a process or structure standpoint.
- Help business owners to establish what their business is worth and what their asking price should be.
- Locate buyers and facilitate the sale.
- Do not work for the CPA or an attorney firm.
What business owners can do in order to prepare their business for sale
Always begin with the end in mind.
The biggest inhibitor to a business being able to be sold as well as the price at which it can be sold is if the business is too dependent on the owner.
- Ensure that there is a team structure within the business and delegate responsibilities to them.
- Less intervention by the owner the better the outcome of the sale.
- Create a vision and mission that you would like the business to accomplish.
- Ensure that the business is profitable.
- Create procedures that are simple enough to replicate.
- Create a financial and management structure.
Business valuation and the aspects involved
The business evaluation should be done independently and objectively. There are three steps to the business valuation and those include:
- The value of the assets.
- The value of the cash flow.
- Comparisons to other businesses.
Some ways to sell a business
- Passing the business down to a family member.
- Transfer of the business to an employee or other related party involved in business
- Transfer of the business to an unrelated third party.
In both options 2&3 there is a combination of cash down payment, financing through a bank/non-bank entity or seller note/earn-out.
In a situation where it becomes known that the business is for sale there is a grave possibility of losing your best clients and best employees.
An NDA is important as it serves as a protection against the loss of customers and employees. Instead what is done is create a short description of the business for the potential buyer to look at without giving the name of the business away. If someone is interested they will need to prove that they can be a legitimate buying candidate. If they can, they are sent a restrictive NDA to complete, once this is signed they will receive a confidential memorandum that contains information on the business structure, products or services, growth opportunities, and it’s competitive advantage.
Advantages and disadvantages of buying an existing practice vs starting your own
Starting your own practice
Advantages include the fact that the business structure is created by you and you hire all your employees.
Disadvantages include the fact that starting up a business is time-consuming and can be costly.
Buying an existing practice
Advantages include that it can be a great way to build wealth and structures are already in place that are able to generate a substantial amount of profit.
Disadvantages include a high staff turnover which can negatively affect an already existing business.
Mistakes that business owners make when buying and selling
Typically, buying and selling are not symettrical.
- Sellers make the mistake of trying to do the sale on their own. Therefore the pricing is incorrect or there is a lack of confidentiality.
- Buyers make the mistake of not carrying out their due diligence efficiently enough or not doing a sufficient amount of research before purchasing an already existing business.
The sale process of a business
- The process can take up to a year or more.
- Brokers will first have to establish if the business is saleable.
- They will also have to assess if the business is too dependent on the owner.
- The value of the business needs to be profitable before a sale can take place.
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Meet Alison Pidgeon
Alison is a serial entrepreneur with four businesses, one of which is a 15 clinician group practice. She’s also a mom to three boys, wife, coffee drinker and loves to travel. She started her practice in 2015 and, four years later, has two locations. With a specialization in women’s issues, the practices have made a positive impact on the community by offering different types of specialties not being offered anywhere else in the area.
Alison has been working with Practice of the Practice since 2016 and has helped over 70 therapist entrepreneurs start and grow their businesses, through mastermind groups and individual consulting.
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Hi everyone. Welcome to the Grow a Group Practice podcast. I’m really excited you’re here. My name is Alison Pidgeon. I am a group practice owner located in Lancaster, Pennsylvania. And today I have a really interesting interview for you. I am talking to a business broker. So, his name is Frank Arcoleo. I met him, I believe at like a local networking business event a few years ago and was curious about the work that he did and so kind of started picking his brain a little bit about what it would take to sell a business. So, I’m nowhere near being ready to sell my business but from what I understand, it’s important to set up your business in a way that ultimately will make it saleable and will bring the highest price when you are ready to get to that point.
So you might be thinking like, you know, I don’t really know if this is relevant to me, I just started a practice or, I’m only one or two years in or whatever, but I think that he makes the point that it’s important to sort of start with the end in mind of, you know, maybe 20, 30 years from now, you want to sell your business. And you could be doing things today or as you’re setting it up to make it more advantageous for you when you do get to sell it. So, I hope you enjoy this interview. I find this topic fascinating. I’m not sure why, maybe when I grow up, I should become a business broker but Frank kind of explains what he does and sort of some strategies to optimize your business and also mistakes to avoid and things like that. So, I hope you enjoy this episode.
[ALISON]: Today I have with me on the podcast Frank Arcoleo. He is a member of A Neumann & Associates, a full-service mergers and acquisitions advisor to small business owners. And he generally works with businesses that are ranging from a million dollars to a hundred million dollars in revenue. Frank has been working in this field for about the past eight years. Prior to that, he was a management consultant for KPMG and other national and regional consulting firms in the New York metropolitan area and then worked as an independent consultant. Frank is a Louisiana CPA and has earned an MBA in management from The Wharton School of the University of Pennsylvania. Hi, Frank, thanks so much for coming on the podcast today.
[FRANK ARCOLEO]: Great to be here. Thanks for having me.
[ALISON]: Yeah. So, I’m really excited to talk with you today. I think you know, in terms of your role as a business broker, there’s lots of good information that you have to share with us. For listeners in our audience who may not be familiar with what a business broker does, can you kind of give us a brief definition?
[FRANK]: Yeah. We work with small business owners to help them get ready to sell, whether that’s from a process standpoint or structure standpoint. We help them figure out what their business is worth and therefore what the asking price should be and then we actually find buyers and introduce them to buyers and facilitate the actual deal. We don’t do the work of a CPA. We don’t do the work of an attorney. Both of those would be needed in the process, but we actually put buyers and sellers together and get an agreement so that the deal can take place.
[ALISON]: Okay, great. Yeah, so obviously one of your main responsibilities is helping business owners sell their business when they’re ready to do that. I know for me, that is something that crossed my mind at some point in the last five years of having my own business. I’m nowhere near being ready to sell maybe, you know, 20 years from now, I’ll entertain that idea, but I know we have had conversations in the past about, you know, even though I’m very far away from wanting to sell my business, there are some things that I could start doing now that would help it to maybe command a higher price or just ultimately be more attractive to a buyer at the point when I am ready to sell. So, what are some of those things that you would recommend someone could do now, even if they’re not ready to sell in the next two years or something,
[FRANK]: The biggest inhibitor to a business being able to be sold as well as whatever the price at which it could be sold is that the business is too dependent on the owner. So, the best thing that could be done is to make sure that the owner is building a team, is delegating responsibilities to them, whether it’s employees or whether it’s a group of subcontractors or other outsourced professionals that they can use to get things done. But in a sense, business owners feel good because they’re contributing a lot to their business, but in terms of sale, the less they contribute the better because it means that they could actually transition to a new owner without hiccups. So, building a team and getting that team able to do a lot of the business without the owner’s intervention is really key to being able to sell.
[ALISON]: Okay, great. So, does it matter if the team they have built is contractors versus W2 employees? Like, do.es that influence the price at all or how attractive it is to a buyer?
[FRANK]: Well, it could, in the sense that employees tend to be more long lasting and more tied to the business. However, there are ways of having subcontractors that are quite able to fulfill those roles. Obviously each individual situation would be different, but a buyer would always look to see, well, how tightly integrated are those contractors into the business and secondly, what’s the likelihood that they would stay in a new ownership, in an ownership transition. If those things are okay, then subcontractors are just as good as employees.
[ALISON]: Okay. That’s good to know. What are maybe a couple other things that you would recommend someone looks at in terms of maybe structuring their business or how they’re running their business that would help it to be more saleable one day?
[FRANK]: Well, I mean, there’s a lot of things that are important. I mean, everyone who buys or starts a business should really be looking towards the future and looking at the end. So, there’s a saying that you should always begin with the end in mind and we always recommend that to our clients. So, the object of the game is in making day to day decisions, you’re not only solving current operating or business issues, but also laying the pathwork for a business structure that can be sold. You know, obviously making the business profitable, having procedures that are replicatable that aren’t one offs, having some structure in the business itself, both a financial structure, as well as a management structure.
Those are all important things in order to make a business saleable in the long-term. You know, a culture is important, creating your own culture and in a way to solve and serve clients in a way that’s unique and attractive and profitable. Those are things that can be done throughout the life of a business in order to make it successful and saleable.
[ALISON]: Okay, great. I like that you brought up about the having systems and processes in place. And I think a lot of times people start a business and it’s just them. And so, they don’t think to write down what they’re doing, and then they start hiring people and they’re like, “Oh, I should really be writing these things down.” Well, of course then if you have all of that written down and you have a really clear system or process that works really well, then you could show that to the perspective buyer to see, to show them like, “Hey, you don’t have to reinvent the wheel. We have it all written down and we know this works.”
[FRANK]: Right. That’s very, very important. And also, I mean, it can be used as a training tool. It can be used for a lot of reasons other than just as a prospective buyer.
[ALISON]: Right. Yeah, I mean, your business is just going to run better the more you have things written down and systematized.
[ALISON]: Right. I know one thing that I hear a lot of business owners talk about is this concept of business valuation. And I unfortunately hear a lot of people just talk about it in simplistic terms. Like somebody will say, “Well, how do I know how much my business is worth?” And then somebody else will chime in and be like, “Oh, well just take your profit times three. And that’s what it’s worth.” And it’s like, after I talked to you, I was like, “Oh no, this is much more complicated than that.” So I guess I just sort of wanted to like ask you to sort of debunk that myth that business valuation is that simple and then maybe kind of give us the overview of what are they looking at when they’re doing evaluation and kind of what are all the aspects involved in that?
[FRANK]: Sure. Well, first of all, the most important aspect of evaluation is that it be done independently and objectively. There really are valuation methods that are not just from, you know thumbnail approaches or gross estimations. There really are some scientific things that can be done and so it’s, because of that, you really need somebody who’s independent of the business owner, who isn’t looking to make the business worth as much as it can be, or as little as it could be. You need somebody who’s objective. So, that’s the very first thing. We, for example, don’t do valuations ourselves. We always farm them out to business partners who are not obligated to give a particular outcome, that are obligated to give the right value.
Now what they do in order to assess that value is really three types of things. They look at the value of the assets. If it’s an asset intensive business the value of the assets could be critical to what the value of the business is. I would expect that in the group therapy practices and related fields, it would not generally be an asset intensive business. So, those, the asset value measures would probably be less important.
[ALISON]: Right, because all we have is like furniture.
[FRANK]: Right. I mean, well, if you were a dentist and had x-ray machines and complex, you know, that’s a different set of criteria with respect to assets. The second thing they look at is the value of the cash flows. And that’s probably, I think the most important, because from a buyer standpoint, their intention is to invest a certain amount of money in buying a business, and after the transition to the new ownership, they want to be able to get a return on that investment. And the return is in the form of cash payments, cash returns and so cash, the value of the cash flows is very, very significant to the valuation. Now, how much should the cash flows be valued? You throw out a number of three. Well, it could be three, it could it be two, could it be four.
You don’t know, unless you do an assessment of the business, its industry, as well as its prospects and a whole bunch of other factors, those things are actually taken into account by a valuation firm in order to establish what kind of multiples should be used. Finally, evaluation firm looks to compare the business being valued to other businesses that have actually been sold in that industry, in the marketplace over the last six months or nine months or 12 months in order that they can say, “Well, okay you know, for this kind of business that sold that, you know, one times revenue or it’s sold at three times seller’s discretionary cash flow,” or whatever the measure is. But they look to compare the metrics of the business to be valued against what other deals have happened in the marketplace.
And that’s one of the things that is very important because your general CPA or a business advisor typically doesn’t have access to that data. It’s not like real estate where you can just go look at realtor.com and look at the caps in order to get comparable business sales. You need to actually subscribe to those databases. And typically, only professional valuation firms are interested or able to afford that in order to do the valuations. So, there’s three things, the assets, the cash flow, and comparisons to other businesses.
[ALISON]: Okay, great. That’s very helpful description. What are some different ways that a business can be bought or sold from the finance standpoint? Because I think that’s the other thing that surprised me. I know you said it’s not uncommon that an employee of the business would sort of be groomed to become the new owner, and then they do, and you can explain this probably much better than I can, but they do, you call it an earnout? Is that how you described it, or is that the term?
[FRANK]: Yes, that is although earnouts can be used in other situations also. So, they’re really three kinds of sales. One is the one that we least get involved with, and that is the passing of a business from, let’s say the father to the daughter or the son where it’s inside the family and it’s a family business that is transferred. So, the only way that we can help in that kind of situation is in helping to establish what the value of the business is in order to decide how to structure the transition or the transfer. The other two are transfers to employees and, or other related parties that are involved in the business or transfers to unrelated third parties. And in both of those latter situations, there’s a combination of cash down payment, financing through a bank or non-bank entity so that the owner actually does get paid upfront, but that the money comes through financing.
And a lot of times the financing is done through the small business administration or other kinds of lenders and we know, depending on the kind of business and whether it’s asset intensive or whatever, we know what kinds of lenders would be interested in lending to purchase such a business. The third aspect besides cash down payment and a bank or non-bank financing is the thing we would call either a seller note or an earnout situation. Now, in a seller note, it’s actually a fixed amount with an interest rate and the term just like a bank would be, but it’s not the bank holding the note. It is the seller of the business.
So, they would get paid a portion of the purchase price over time. An earnout is like that, except that the value of the owner depends upon something that happens in the future. For example, the business could be sold subject to a 2% or so of revenue above a certain amount, because the seller believes that the business is going to grow. And, you know, the buyer is saying, “Well, if it grows, I’m willing to pay more for it. So, the owner could earn a percentage of the increase in revenues, that kind of thing. So, it can get pretty complex structuring a business, but it all depends upon the cashflow, the stability of the business, the growth opportunities, and the risk factors; all determine how a deal is put together with respect to the components of each piece. Does that make sense?
[ALISON]: Yeah. So, that’s the reason you need a business broker because it can get complicated. So, it sounds like the last two options that you were talking about is just like the seller giving the new owner a private loan, and just saying like, “You have to pay me X number of dollars per month over this many years, and then you finally pay me back and then you don’t have to pay me anymore?”
[ALISON]: And then the second one is more that scenario, but then on top of that, they could get some portion of the profits.
[ALISON]: Okay. And then is there then a cap too, in terms of continuing to get the money, the profit sharing money, or is that just in perpetuity they can get the profit sharing money?
[FRANK]: No, it’s only for a certain amount of time, typically three to five years.
[ALISON]: Okay. So, when you’re looking at helping somebody sell a service-based business, like a therapy practice, is there a typical way that financing is structured or is it just sort of dependent on the circumstances and who’s buying it and that kind of thing?
[FRANK]: Well, in a business like what you’re talking about, a service business without a heavy asset load the business would normally be sold on the basis of cash flow. So, what the cash flow is and how sustainable it is and how likely it is that that cashflow can continue to occur after the transition of the seller away from the business. Those are the important aspects of it. And because of that, typically a traditional commercial bank would generally not be the lender of record. It would typically be an SBA loan because the SBA does in fact guarantee loans that are heavily based on cash flow. So, I would say, in a service business, the thing we see the most is SBA financing for buyers of those businesses. So, that’s what it’d be.
[ALISON]: Okay. And is there any rule of thumb about the amount of a down payment that you’d have to put down to buy a business, or does it just depend on kind of what the owner wants or the SBA, or?
[FRANK]: You’d have to work with the particular lender in order to do that? I have seen 90% financing in some instances. As a general rule, we typically see 25% down payment by the buyer and then the rest financed either through, you know, a financial institution or the seller or both. So, 25% is the normal amount of down payment. And quite frankly, when a buyer indicates that they’re interested in a business that we are in fact acting as the broker for, we make sure that they can show us that they’ve got that 25% of the anticipated purchase price in cash up front, or else we don’t even show them the details of the business, because we don’t want window shoppers or tire kickers or people like that. We want legitimate potential buyers involved in the business.
[ALISON]: Right, because otherwise, you’re just wasting everybody’s time.
[FRANK]: And it’s actually worse than that because you could compromise the confidentiality of the whole thing and word would get out that the business is for sale and you don’t want that to happen.
[ALISON]: Yeah. Can you, I’m glad you brought that up because that was something I did want to ask you about. I understand that when you are looking to buy or sell a business, it’s very common that you would sign what’s called a nondisclosure agreement. Is there any other kind of details about that, that you think are important to share or I know too, like you said, you don’t necessarily want the word to get out that the business is for sale? So, like, why is that?
[FRANK]: Well, let’s compare it to the thing that it’s most often compared to. Everybody thinks selling a business is like selling real estate. Both people call brokers and you have a buyer and a seller in the process and all that, and some forms but they’re really very different. In a real estate situation, you want to put a sign on the building, you want to advertise it, you want everybody to know that such and such a building is for sale. And you’re trolling the whole world for buyers. Right? You want everybody to know that it’s for sale.
[FRANK]: In a business, if you let everybody know that the businesses for sale, there could be some serious repercussions. So, if I’m a customer of the business or a client of the service provider, and I hear that your practice is up for sale, I’m going to go, “Well, what if I don’t like the new person? What if I don’t like the new owner? What if I don’t like the way that they do things? I’m going to consider maybe looking around for another provider because I don’t want to take chances of not liking the new owner.” That happens a lot. The other thing is if you’re an employee of that business that is found out to be for sale, you say, “Well, what if I don’t like the new owner? You know another organization has been asking me to look at them and potentially come to work for them. Maybe now’s the time to take a look at that.” So, in a situation where it becomes known that a business is for sale, there’s a grave possibility of losing your best customers or clients and losing your best employees. You never want that to happen because the value of the business will actually go down during the sale process.
[ALISON]: Ah, okay.
[FRANK]: So that’s why confidentiality is important. So, you can’t just hang a sign on the building and say, ‘Business for sale.’ ‘Practice for sale.’ You can’t do that because it can have serious negative repercussions. So, what do you do instead? So, we create a two-page thumbnail description of the business that is enough to communicate the essentials of it to a potential buyer, but isn’t enough to give away who it is. So, they can’t actually identify you from this thumbnail to page scouts that we published to the world. So, while they’re, you know, while potential buyers are looking at opportunities that they see out there, either because we send them emails or because we post them on websites or clearinghouses people look at it and they say, they call our buying department and they say, “You know, I’m interested in such and such a practice. ”
And we say, “Great, I’m really happy to hear that. The asking price of that business is, you know, 1.8 million. So, you need to tell us a little bit more about yourself and can you actually do the deal? And they then send us information that shows that they can in fact, be a legitimate buying candidate. Once that happens, then we ship them a rather restrictive nondisclosure agreement, because again, we don’t want work to get out. And once they sign the nondisclosure agreement, then we give them a much more elaborate document called the confidential memorandum that is really everything about the business that we know; the business structure, both financial and employees, products and services, geography served, growth opportunities, competitive advantage. Everything we know about the business is in that document, along with historical and projected financial statements and a copy of the valuation itself.
But only after we know that a buyer is qualified to buy the business and is bound by nondisclosure agreement do they get the full information about the business itself? I think that might’ve been too long-winded an answer, but that’s important because that’s really, that’s the nuts and bolts of what we do in order to protect a seller against business devaluation.
[ALISON]: Yeah, no, that’s, that’s very helpful. And that’s actually kind of segues into my next question, which was about, if someone was interested maybe in buying a private practice, are there certain things that they should look for? And do you think that there are advantages or disadvantages to buying an existing practice versus starting your own practice?
[FRANK]: Well, when you start your own, you can make it into whatever you want it to be. It’s really your baby and you can structure it how you want. You can handpick your employees, you can, write the, excuse me, the employee manual. So, it’s all your own. So, that’s the good part of starting your own. However, typically in a startup situation, it takes a while for the business to become profitable. So, if you’re starting the business yourself, you’re sustaining, generally some losses as you build the business to a scale that becomes profitable. In addition to that, unprofitable businesses certainly can’t be sold. It’s maybe tough for them to be financed but if you have a business that’s already up and running and that’s already learned the lessons the hard way about how to structure it, how to actually schedule things, how to choose employees, it’s built up a reputation, you know, you can, if you’ve got that same amount to invest, you can actually get a business that’s already up and running and already generating profits from day one, rather than having to build it yourself.
[ALISON]: Yeah, because I think about the first two years of my own business, just being totally blood, sweat, and tears, making very little money. I mean, I’m now number five and so now I’m like, “This is fantastic. I love it. I work less than I used to and make more money.” But in those first two years, it’s like rough, just getting things going. And so, I can see the appeal of like, “Oh, I could buy like a turnkey business and sort of skip that first phase where I was like hustling all the time.”
[FRANK]: Right. I mean, I’m sure you were quite knowledgeable about your field to begin with, but still there’s a difference between working for someone else and working on your own. And there’s a lot of lessons that come with that, that often are hard lessons to learn.
[ALISON]: Right. Yeah, I definitely think there’s pros and cons to both. And I can see though, too, if your business isn’t running well, especially if it’s the same type of business that you’re already familiar with, it’s going to be obvious to the buyer and then the buyer might be thinking, “Well, why would I buy this mess when I could just start my own thing and have it running well from the beginning?”
[FRANK]: Yup, and I think there’s another aspect of that that goes back to culture, because if there’s just some process or some marketing issues, or whatever’s wrong with the business that you’re considering buying, that can all be fixed. But I mean, if the culture is a mess, then that may be way more difficult to fix and to do something about. So, starting your own in that situation might be a better choice.
[ALISON]: Uh, so like in that example that you just gave, are there other things that if I was, for example, looking at buying a practice that would sort of be like a big red flag, like you should probably walk away? Like if they have trouble retaining employees off the top of my head, that would be one of my guesses that if there was lots of turnover, I should probably run the other way.
[FRANK]: Another situation that may not cause you to walk away, but might cause you to, as a buyer want an earnout is if the perspective you know, company has only a few relationships with a few customers that are a large part of its business, because, it may be very profitable, but if 80% of their business is centered into four or five customers, you know, like a health chain or something like that and that health chain goes away for whatever reason that business could be in serious trouble, because it could lose, you know, 15, 20% of its business. And in most cases that kind of a hit would turn a business immediately unprofitable and would have repercussions for employees and perhaps for other customers.
So, in that case, we typically offer earnouts scenarios where, you know, if there’s large customer concentration, which is what’s the term for that, then we say, we believe that those customers are loyal to the business and are happy with what we’re providing but part of the purchase price can be earned as those customers continue to be customers.
[ALISON]: Ah, okay. Yeah, that makes sense. What are some of the biggest mistakes that you see owners make, but I guess we could also include sellers in there as well, when they’re looking at either buying or selling their business?
[FRANK]: Well typically buying and selling are not symmetrical. Many, if not, most buyers have bought before. Many and most sellers have never sold before. So, the biggest mistake that a seller makes, I mean, when you think about it, I mean, most of it is, you know somebody starts a business or they get the business through their family and they spend their life in the business and their business kind of is their inheritance, their retirement, is their everything. And they go to, they say, “Well, okay, I finally need to sell it in order to retire.” The biggest mistake they can make is trying to do it themselves. And I tell everybody, “Well, who are your competitors?” I say, well, our biggest competitor is nobody. Our biggest competitor is business owners trying to do it themselves.
And there are two pieces that are related to that. Number one, they price it wrong. Most business owners have an optimistic, I wouldn’t call it inflated, but let’s call it an optimistic view of what the value of their business is. And it may not correspond to what the value is in the marketplace and if you ask too much for a business, it will not get sold. And in fact, if you start decreasing your asking price, it goes into freefall and you could get even less for it if you try to ask too much upfront.
[ALISON]: So it’s really important to have it priced well from the beginning, right?
[FRANK]: Yeah. I liken it to that old show The Prices is Right. You want to go up to the value, but not over. You want to get as close to real value as possible. And so, the biggest mistake in doing it yourself is pricing it wrong. The second is what I told you before about confidentiality, because it is really, really hard for a business owner to sell their own business and maintain some sort of secrecy that their business is for sale. Because after all, if they’re going to sell it, they’re going to approach someone and it’s not going to be some generic business that the identity is hidden. It’s going to be their business. So, it’s clearly not going to be confidential. And the worst thing you could do is actually talk to your competitor about, “You know, I’m thinking of retiring. Would you be interested in buying my business from me?”
Well, I mean, they see blood in the water. They see great. I can spread the rumor that Alison is going out of business and the customers and employees are going to flock to me and I don’t have to pay anything for it. So, that’s the other thing. So, the biggest mistake that sellers try to do is to do it themselves. I think that the biggest mistake that buyers make is not doing a proper due diligence because buyers buy on the basis of what we the brokers tell them about the business. And so, once a deal is arrived at, it’s the buyer’s responsibility to go make sure that everything we told them is correct. And so, they do their own investigation of the business and its operations and its financial profitability. And the biggest mistake that a buyer would make is not looking at that seriously.
[ALISON]: So is that something that if they have a business broker, they would help with doing all of that due diligence?
[FRANK]: Well, generally, as I said buyers have bought before, so they often don’t have a broker representing them but what they have done is they’ve built a team for doing acquisitions. Typically it’s, you know, private equity firms or family offices or things like that that they have a company that they hire to go do their due diligence. You know, they say, “Here are the financials. Go and verify that what they have told us is indeed the correct view of the business.
[ALISON]: Okay. Do you think the business owner gets emotionally attached to the business and then that interferes with the whole process of selling?
[FRANK]: Unfortunately, yes. You know, every business owner exits their business one way or the other. They could either do it gracefully, or they could do it not so gracefully. If they do it gracefully, they’re likely to put themselves and their family in the best possible financial position, because they’ve done it properly and have actually gotten what the business is worth when it’s still worth it. There are some unfortunate situations. I’ve actually seen some where owners have become disabled or actually passed away before they had the trouble, excuse me, before they had the opportunity to sell the business and their untimely departure from the business, their unscheduled, unplanned departure from the business actually damage the business so that it was worth either much less or nothing at all. So, that’s one thing.
Other thing is we have actually gotten to situations where we’ve gotten full price offers from buyers, and it’s only at that point that the seller realizes that they’re about to no longer be the owner of that business that they’ve been the owner of for 40 years and they could panic. And, so we do have situations where when that owner piers over the cliff and says.” Oh my God, tomorrow, I am not going to be involved with business anymore.” They freak out and have second, third and fourth thoughts about whether they are actually ready to sell.
[ALISON]: Yeah. I think I can totally see how that ends if you know, you’ve been running that business or owning that business for that long a period of time. And I know for me, it really feels like when you, especially when you start something from scratch and you built it up and I mean, it feels like another child.
[FRANK]: Yes. Their whole identity is tied up in being the owner of that business. That’s how they’ve represented themselves to the community for decades.
[ALISON]: Right. And then it’s like, they almost have to change their whole identity when they think about selling the business.
[FRANK]: I think they need, you know, psychological assistance with that.
[ALISON]: Right. Then they could just come see one of us for therapy.
[ALISON]: So if I were to come to you today and say, “Hey, I want to sell my business in the near future.” How far out should I be getting ready to sell the business? Well, like, can I sell the next month? Can I sell it in a year? How long does that process take?
[FRANK]: Certainly not next month. You know, my, how do I say this? My long-term glib answer is no matter when you’re thinking about, no matter when you might sell it, you should start preparing for that now. There’s no time like the present. And that’s why I also say you should begin to have any endeavor with the end in mind. You should all be thinking about what that end game is going to look like. So, it is never too early to prepare to sell. Now on a very practical matter, there is a process of doing this and the process can take a whole year or more. Number one, we help business owners assess whether their business is saleable. And that goes to what we talked about at the very beginning, which is whether the business is too dependent on the owner themselves.
It may take a while for the owner to in fact delegate and to set up systems and document processes and those kinds of things in order to make the business more standalone, as opposed to dependent on their physical presence. So, you can add that, you know, the time it takes to do that, to the timeline of how long it’s required. The second thing is that the value of the business, once the business is valued, it may not be enough for the owner to retire. If the owner, his financial advisor has said, “You need $2 million in order to retire,” and it turns out the business is only worth 1.3, well guess what, there may be some work that the owner needs to do in order to increase the profitability and the value of the business so that it hits that magic to a million dollar mark that they can actually retire on. So, you need to be able to allow time for that to happen if indeed it needs to happen.
Once all those things are in a row, the business is saleable and the value is acceptable. From then, it could actually be done pretty quickly. It could be done within six months or so. And that includes, you know, the marketing of the business, the introduction of potential buyers, the negotiation of a formalized offer, as well as the legal work to actually take that offer and convert it into actual documents of sale. So, but you know, it depends on how long it takes. Some businesses are more difficult to sell than others and it depends on the market.
Now, having said that the market right now is heavily buyer heavy. It’s a sellers’ market, even though baby boomer business owners have begun to retire in greater numbers. There’s still, the economy is still a wash in cash and there’s a lot of money chasing, much better returns than you can get in the bond market with much less volatility or risk than the stock market. So, buying a whole business is a way of getting a good return, and although you can never control all risk, you can at least manage it and influence the risk, which you can’t do if you by shares or stock.
[ALISON]: Yeah, that’s really interesting. I’m glad that you brought up that point because I think that buying a business or selling a business is another way of building wealth that we don’t often think about because we always hear about investing in the stock market, or maybe we hear about investing in real estate, but investing in businesses I guess, is a whole nother way of building up wealth and retirement funds.
[FRANK]: Yup. Most definitely, and again, you know, there is no riskless way to earn money. Not even as an employee, is it riskless to earn money, but you know, on balance you get better return and the ability to manage the risk that you’re taking in that business, if you own the whole business, rather than just a piece. So, it’s a great way to build wealth.
[ALISON]: Yeah, that’s great. And I wanted to say we are running out of time and I really appreciated all of your knowledge and sharing all this information with us. It’s very interesting to me, and I think it will be interesting to many of our listeners as well. If anyone listening wants to get in touch with you, can you give us your contact information and then also let us know, I understand you have a certain territory that you work in with the business broker work that you do. So, can you tell us about that as well?
[FRANK]: Yeah, I think, you know, our firm is an East Coast firm, so we go basically from Southern Connecticut down to Florida with some gaps like Georgia and whatever, but we’re basically an East Coast firm and we operate by regions. And the reason that we have regions is because we don’t just do this over the phone. We actually meet with people in person. When I introduce a buyer to a seller, I do it in person. I don’t do it over the phone. So, we regionalized in order to make it reasonably able to actually get to clients and potential clients. So, my primary region is central Pennsylvania, but I do extend into Eastern Pennsylvania including Northeastern like Lehigh Valley area and I actually do have clients in central New York. So, basically central Pennsylvania, Eastern Pennsylvania, central New York, not New York City, but central New York is really my prime area.
However, if there’s anybody outside that area, I could put them in touch with the regional director who is from our firm that could actually help them. On the other side, though, the best way to reach me is through email and that email address is email@example.com (That’s A R C O L E O @neumannassociates.com. Neumann is the German way, N E U M A N N associates, all one-word (dot) com. And, you know, all those emails come directly to me and I’ll be able to respond it’s whether me assisting in person or referring you to our regional representative and regional managing director.
[ALISON]: Okay, great. Thank you so much. I really appreciate your time today.
[FRANK]: Oh, you’re welcome. This has been fun. We were having fun, right?
[ALISON]: Yeah, it went fast. This is all very interesting to me. And I’m glad that we were able to have you on the podcast so that we can all start thinking about selling our practices one day.
[FRANK]: All right. You know, like I said, when you start them, you should be thinking about the end game. So, it’s, and you know what, that makes things work smoother all the way through.
[ALISON]: Right. Well, thank you so much.
[FRANK]: You’re welcome.
[ALISON]: So, I really appreciated that Frank has a very clear way of explaining things and you know, I always learn something new when I talk to him. I’m using some of his suggestions and my own practice, like he was talking about with making the business less reliant on the owner and so that was actually one of the reasons why I stopped seeing clients because one day when I go to sell the practice, you know, even if it’s 20 years from now, I can show that it makes a lot of revenue that’s not dependent on me seeing clients. So, I really appreciate the tips that he gave us, and I hope that you found them valuable as well. And I will see you next time.
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This podcast is designed to provide accurate and authoritative information in regards to the subject matter covered. This is given with the understanding that neither the host, Practice of the Practice, or the guests are providing legal, mental health or other professional information. If you need a professional, you should find one.