Sellers
Why use Business 4 Sale in Spain ? DETAIL, DETAIL, DETAIL !
Believe it or not, most small and medium size businesses in Spain are still sold by word of mouth. A potential buyer contacts a business owner directly and makes an offer for the business. After some negotiation the buyer and seller arrive to an agreed upon price and make a deal. While this approach is simple and appears less costly for the seller, in most cases it ends up costing the seller much more than the “broker's commission”. Sellers are not normally financial experts; they have never sold a business before and have no real idea about how much their business is worth. The buyer however, will in most cases use the services of accountants who are specialized in business sales who know all of the business purchase process in detail.
Furthermore, since the business has not been “on the market” and exposed to other potential buyers, there is no way to know what the business could sell for, the seller is so focused on “making the sale” to the only one potential buyer he/she normally ends up conceding to many things he/she would not have accepted if the business was on the market. The result being the business is sold at a lower price than market value !!!.
At Business 4 Sale in Spain , we advertise your business using may mediums across numerous regions of the world to make sure that we will attract the best potential buyers who will get the most value from your business and as a result, will pay the highest price.
Reason(s) for selling
It is important to understand the real reason why you are considering selling your business. You need to have a clear idea about what your expectations are and whether they could be fulfilled by simply selling your business. Also, most buyers want to know the reason you are selling. Buyers have a legitimate concern that your business is not profitable. If the reason you are selling is not clearly stated, the majority of buyers will assume their concerns are true and will quickly loose interest in your business.
Structure of the Sale
The structure of the sale is very important and should be determined in advance to reduce any misunderstanding between the seller and potential buyers. We recommend that business sellers seek professional advice from their accountants and lawyers before making such a decision.
Asset sale: the company sells all of its assets (including the registered name) to the new buyer who will have a new legal entity. (Normally only requires a change of name) Assets that could be sold are hard assets such as equipments, real estate etc. or immaterial assets such as goodwill, reputation, licenses and leases, relationships with suppliers, systems, etc. In an asset sale, the company's liabilities SHOULD not be transferred to the new owners. (In most cases the new owner will not acquire the previously owned SL Company although this can be very beneficial to both the seller and buyer alike if handled properly, particularly if the sale is leasehold rather than freehold which is the most common business sale method in Spain. Business 4 Sale legal team can explain this system in detail) The seller takes care of his/her company's liabilities such as debts, tax, previous contracts, If the company for sale has a lot of hard assets, this structure might offer substantial advantages to the buyer as the new legal entity represented by the buyer might be able to depreciate this equipment again and save some tax in the years following the business purchase. Another advantage of the asset sale for the buyer is the depreciation of the goodwill. We will ensure you are given the correct advice as to the structure of your sale.
Confidentiality
Most profitable businesses sell for prices much higher than the value of their hard assets. This supplemental value is called goodwill. A company's goodwill reflects all the intangible factors that are responsible for the company's success. This goodwill could be substantially harmed if employees, customers, suppliers or other stakeholders in the company hear rumors about the company being for sale. The employees might start worrying about the security of their jobs and might leave the company. Customers might question the new owners' ability to deliver the same quality and standard of services/products and might look for new suppliers. Even suppliers might reduce their payment terms as a result of uncertainty about the new ownership capabilities and intentions. For all these reasons, confidentiality is a must in selling a business. Only at the right time, should the owner inform different stakeholders about the sale of the company. The seller/broker should make sure not to advertise any information about the business that could make it identifiable. Potential buyers should be screened and should sign a confidentiality agreement before receiving any information about the business. This is generally very difficult to do by the business owner him/herself. The business broker is experienced in this selection and should make sure no confidential information is given to any wrong hands.
Determination of an asking price
Whilst we work with smaller businesses on a daily basis, having experience of purchases above €50 million Business 4 sale in Spain is well placed to assist you in appraising and valuing your “larger” business, we do highly recommend the use of professional business appraisers before starting the process of selling a business. However, for the majority of small business transactions experienced business brokers such as Business 4 Sale In Spain can determine within a reasonable range a fair asking price for the sale of the business.
How do we calculate the asking price for your business?
1 Normalization of your income statement
Financial statements are the primary tool used to come up with a reasonable asking price for the business. However, for a majority of small businesses, financial statements do not show the business at its best lights. Their primary purpose is to reduce tax, not to show profits. In order to get a real picture of the profits, financial statements should be corrected by adding to the profits any benefits the business owner is getting from his business indirectly but that are not necessary for running the business. Examples of those “false” costs include residential expense, auto expenses, pension funds, personal insurance, travel, donations etc. The owner salary, depreciation, amortization and interest expenses should also be added to the profits. Thus, the total calculated is the Seller Discretionary Earning (SDE) or Total Owner Benefits (TOB). To get a reasonable asking price, this amount should be multiplied by a multiplier.
2 Determination of a multiplier
The majority of small businesses sell for multipliers between 1 and 3. The determination of these multipliers is more an art than a science. Many factors are taken into consideration such as:
- How many years has the business being existing?
- How many years has the seller owned the business?
- How much cash does the seller want for the business?
- Is the seller prepared to finance the purchase?
- How competitive is the industry?
- Is it a growing business?
- What is the quality of the location and facilities?
- Is this business/industry attractive to potential buyers?
- Is the industry growing and by how much?
- How easy is it to replicate the same business?
- The economic climate at the time of sale.
Business 4 Sale in Spain consultants will apply a factor of between 1 and 4 to each component and finally a combined multiplier is calculated
Putting an asking price on the business
Once the asking price has been arrived at, using the Seller Discretionary Earnings\ Owner Benefit described previously, will be used to sell the business. The more accurately this initial price is determined the more confident the business owner and his/her broker will feel about it and the closer to the transaction price it will be. A common question asked by business sellers is whether or not business buyers know about this method and whether their offers for the business take the method into consideration. The answer is that many buyers have never heard about the method. However, buyers compare many businesses before making an offer on their preferred one. One of the first criteria buyers consider is how much profit they will get once they buy the business compared to how much investment they need to make. In another term, buyers compare the income multipliers for each business they are considering. Therefore, even without knowing about the seller discretionary method, buyers still come up with an intuitive valuation that finally is very close to this method. Buyers will also factor some criteria when coming up with the multiplier they are willing to pay for the business. Among these criteria are the attractiveness of the business, the attractiveness of the industry, the risk and the likelihood of continuity of profits after the sale etc. In summary these are the same criteria we consider when calculating a multiplier in the Seller Discretionary earnings method.
Doing a Business Profile
After the determination of the optimal asking price for the business, business sellers need to present their business as accurately as possible to potential buyers. Some documentation is necessary to present a real picture of the business to potential buyers. This is a list of the documentation to be prepared before putting a business on the market: ( Don’t panic, Business 4 Sale consultants can help you in pulling together all the required information)
- Financial statements for at least the last 3 years or length of trading and preferably for 5 years for larger
- Lease Contract
- License(s) required to run the business
- Equipment list
- Basic information about the type of business
A business profile is a short summary of the business for sale providing initial information about the business. This profile should be detailed enough to incite buyers' Business 4 Sale in Spain consultants are expert in this and will complete this on your behalf, seeking your approval before publication.
Doing a Marketing Plan
The marketing plan details the activities that will be launched to help sell the business. A deep analysis should identify a list of categories of potential buyers for the business. For example, if the business is a possible strategic acquisition for a larger company then a description of the ideal buyer should be done and a list of potential strategic buyers should be compiled.
Advertising the Business for Sale
Once the target categories of potential buyers are determined, a detailed advertising plan is crafted to reach the potential buyers identified in the marketing plan. Internet advertising is becoming a key advertising medium for selling businesses. An important number of web sites specialized in selling businesses provide excellent leads of business buyers. As part of a much wider reaching group, Business 4 Sale in Spain are experts in this area.
Buyer Qualification
Statistics show that only 10% of potential business buyers end up buying a business. In other words 90% are “tire kickers” or time wasters. As a result, qualifying buyers is critical in selling a business. If the seller spends the same amount of time with every potential buyer inquiring about his/her business, he/she will be so overwhelmed by the number of repetitive questions and the huge amount of time spent and therefore will be discouraged from selling.
Moreover, many of the potential buyers might be current or future competitors learning about the industry. "The best way to learn about a new business you want to get in is to pretend you are a business buyer and meet business sellers in the same industry". For these reasons we strongly advise business sellers to seek professional advice from business brokers when selling their businesses. Business 4 Sale in Spain consultants will always pay particular attention to screening potential buyers before presenting them to sellers.
Providing Information to the Buyers
Not all information about the business should be given to potential buyers. Confidential information should be kept until the buyer shows his/her commitment by making a reasonable offer and a deposit. Naturally you can not expect an offer from a buyer before giving reasonable information. But what is reasonable? It is difficult to answer this question because it depends on the business being sold. In general terms, any information that could be used by competitors should not be given in an early stage.
Business Showing
Showing the business to potential buyers after they have been qualified is a necessary step in selling a business. The showing is important since buyers need to picture themselves managing the business before making a decision about buying the business. Most sellers try to paint a perfect picture of the business. This in generally not a good idea for many reasons:
- Buyers do not expect the business to be perfect; sellers can lose credibility trying to paint a perfect picture.
- If the buyer is mislead about the business he/she will finally discover this during the due diligence period and may loose interest. The seller will end up wasting a lot of time and money on lawyer and accounting fees.
- Most buyers look for businesses they can improve and expect to make more money than the previous owner. If the business is already perfect, it is difficult to improve and it looses its attractiveness as a result.
We advise that sellers present the most accurate picture of their business by simply telling the truth, the good the bad and the ugly about the business. They will save a lot of time and money and will make the selling experience much more enjoyable.
Making a Conditional Offers for Buyers
Most potential business buyers are first time buyers. They have not purchased businesses before and need professional advice to make an offer. If the business has been sold with the help of Business 4 Sale in Spain, we will generally helps potential buyers write an offer for the business through our legal team, a standard deposit of 10% of the purchase price or €5000 (whichever is greater) is required by Business 4 Sale in Spain at this time. These funds are then placed in to a secure client account and remain there until the day of closing. As a result buyers feel secure putting in a confidential offer even if they do not have all the information they need about the business. At this point the potential buyer will initiate the due diligence process through their appointed legal representation.
Selecting Offers
In some cases the business attracts more than one buyer and receives multiple offers. It becomes a challenge to make a decision about which offer to accept. While the price is a determining factor, it is not the only factor. Remember that the offers at this stage are only conditional offers.
Accepting a Conditional Offer
Before a potential buyer can make a firm offer on your business, he/she will need to check that the information you provided him with is accurate. For this reason, the buyer may put some conditions in the offer, “subject to clauses” If the conditions are not fulfilled the business will not be sold and the initial deposit will have to be reimbursed. Some of the conditions will be related to your business and all information provided to the buyer initially. Other conditions are more related to the buyer. For example, the buyer may need financing from a bank and will need to get bank approval (for freehold) It is generally wise for the seller to consider not only the offered price but also the conditions. For example an offer on a business with a condition on financing should be considered with skepticism. What is the probability that the potential buyer gets the bank loan?
Due Diligence Process
The due diligence period starts when the buyer makes a conditional offer and ends when the buyer makes his/her final decision about buying a business. (This period is normally 30-60 days in Spain) It is not uncommon for experienced buyers to try and renegotiates the purchase price during the due diligence period, particularly when confronted by surprising information that was not disclosed initially.