Business for sale

9/2/2020

Scott Smoldt was golfing with someone from his club when they started talking about their professions.

The man, a business broker, asked Smoldt whether he’d ever considered selling his business, Smoldt Moving & Storage. Smoldt, who purchased the family-owned business in 2002 when his dad retired, told the man he was thinking about retiring in five years.

The broker suggested Smoldt go ahead and list the business. Within two months, it had sold.

Smoldt had been mentally preparing to sell the business for about two to three years before the 2019 sale. He’d had individuals contact him and make offers, but he wasn’t ready yet.

“It was at the back of my mind, and I knew at some point I was going to need to move away from it,” he says of the company, which his father founded and some of his siblings still worked for.

Create a plan

While the sale went smoothly for Smoldt, business brokers and other experts suggest prospective sellers make a plan for selling their business and continue to operate it as though they will own it into the future to receive the biggest payout.

A professional brokerage company can help business owners navigate the complexities of selling a business or how to transition to a new owner.

“We view ourselves as somebody that helps provide succession solutions,” says Al Lorenzen, the president of The Business Brokers Inc. in Urbandale, which helped assist Smoldt’s sale.

Lorenzen’s company works with mostly small businesses valued between $250,000 and $2.5 million. He says succession planning for businesses is important everywhere but especially in small towns. If an employer with 20 employees wants out of his or her business, the option is to shut down and have an auction or sell the business.

“The last thing we want to do is see them close and that community lose 20 jobs,” Lorenzen says.

He encourages business owners to have a five- to seven-year plan that includes feedback from a banker, financial planner, certified public accountant, an attorney and others who can assist in assuring all steps have been taken for the eventual sale or ownership transition. This might mean transferring the business to a family member or employee, or including a broker to help find a third party to purchase the business.

Professionals also can help guide a business owner through what type of sale would be most beneficial when it comes to taxes and the consequences of a sale, Lorenzen says. For example, the owner could choose to structure the sale over several years or to finance part of the purchase for the new owner, both of which can have tax benefits.

“There’s a lot of planning we encourage people to do,” Lorenzen says. “What we hate to see is if someone puts off a transition and then they’re forced to sell, whether it’s a health concern or a market circumstance. When someone puts themselves in a position where they run out of options, they don’t really maximize the value of their business.”

Be honest about reasons for selling

Most buyers will want to know why someone is selling his or her business.

For Smoldt, the sale happened before he was planning to retire, but he was ready to step back a bit from the company.

“I’m doing strictly sales,” he says. “I don’t have stress anymore. It’s nice to be able to walk away from it a little bit and just do the things I enjoy doing.”

Business owners sell for a multitude of reasons, says Rod Dempsey, the owner of KR Business Brokers Inc. in Des Moines. This includes
retirement, pursuing other interests, the right offer, or even a death in the family.

Others also sell because a lease is coming to an end, and they don’t want to get into another long-term lease agreement. Other reasons include partnership disputes, illness, being overworked or even bored with the business.

Dempsey’s company does some work with family businesses and says those sales can sometimes be the most difficult, especially if there’s been a death.

“Some of those are harder to sell,” he says. “The sellers’ remorse is worse than trying to sell the family home. This is where they went to make money. Often, we get people to list, and then they regret it when it gets close to sale.”

Get your finances in order

It may sound like common sense, but keep good records and report every dollar earned. A prospective buyer — along with the banker loaning money for the sale — wants to see that the business is profitable.

Most brokers and commercial bankers will require three years of tax returns and an updated profit and loss statement. This will help determine the asking price for the business.

“The more precise the records, the better it is for a potential buyer,” Dempsey says. “Most businesses need to get a business loan, and banks love records. Whether it’s making or losing money, they want to see it.”

For example, one of KR Business Brokers’ listings is a car wash that is being sold because the owner is retiring.

According to the broker’s website, the business made almost $64,000 in net profits in 2019.

Listing net profits gives a prospective buyer a sense of what he or she could expect to make in a year, Dempsey says, speaking in general terms about business sales.

Lorenzen says typical broker fees are about 10 percent and are paid at closing with no up-front costs.

Be prepared to wait

Most commercial properties are listed for 12 to 18 months before they sell.

“Typically, it is not a quick process,” Lorenzen says. “But right now, we’re still seeing good activity.”

A few sales this year were delayed because of coronavirus, but no deals were abandoned.

If the business has not yet been listed, now is the perfect time to consider ways to increase profitability, Lorenzen says.

Value your assets

Businesses that have assets, even if they’ve lost money, are still an attractive purchase.

“If the owner is losing money, it doesn’t mean that’s not a good business to buy,” Dempsey says.

For example, a restaurant with new equipment might be attractive to an aspiring entrepreneur. A taxi company or another business that has a building or cars is sought after from buyers.

The car wash installed $650,000 worth of new equipment in 2019, plus the businessman owns the site.

In the case of Smoldt’s sale, he had a 15,000-square-foot warehouse on the north side of town, plus equipment for his moving company that was attractive to the buyer.

“I had a building that he was really interested in,” Smoldt says. “That was the key factor there.”

Any business owner who is considering selling should continue to operate his or her business as they would if they were going to own it for another 10 years.

“If you need a new piece of equipment, go ahead and replace it,” he says. “If you have different contracts, pursue those as if you’re going to own it in the future even if the plan is to exit sooner.”

Diversify management, revenue sources

Prior to putting the business up for sale, begin to divide management responsibilities. If only one person makes all of the decisions, that can negatively affect the value of the sale.

“If you go on vacation for a month, will the business be the same when you get back?” Lorenzen says. “If not, what do you need to do to de-centralize the process. If you have a sales person who makes a lot of the sales, how do you make sure that sales process transitions with any change in ownership?”

Smoldt still retains most of his customers who work directly with him. He even still has his old email account to make the ownership change seamless to customers.

Lorenzen says a business owner also wants to consider its sources of revenue, the duration of its customers’ contracts and anything else that shows recurring revenue.

“The last thing buyers want to see is that 80 percent of business is with one customer,” he says.

Having a steady management team in place can also help the value of a business, Dempsey says. This helps a new owner take over on day one without having to shut the door and learn the ins and outs of the business.

Keep discussions of the sale confidential

Any professional brokerage company will keep all details of the company and its potential sale confidential for a couple of reasons, Dempsey says.

“Being confidential is very important to our sellers, especially if they have competitors or employees, because if the employees get wind, they can get scared and jump ship,” he says.

When Dempsey’s company meets with a prospective seller or shows the business, they’re quiet about who they are and why they’re at the site.

“We don’t put a big sign in the window,” he says. “That’s where the records and financials come in. Even when we market it, we don’t put in the business name. We put the type of business and the financials to attract a buyer.”

Although the sale was kept quiet until the paperwork was signed, Smoldt had talked with the prospective buyer about whether his employees would still have jobs after the sale. Buyers were told the basics about his company — a moving company located in central Iowa — and given the financial information. He had 12 employees, all of whom were rehired by the new owner. Smoldt himself and his siblings are still working for the company.

There are some clients who don’t care if their employees know. This might include a family-owned business where everyone knows about the sale, Dempsey says.

“They might have already started another job, and this thing is a headache to them,” he says. “For the most part, every business wants to protect that it’s for sale until they’re ready to tell people.” ♦