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Why Seller Financing? Protecting Your Assets?

by Rene’ Paul Manfre your Business, Real Estate and Insurance SpecialistImage

Most small business sales are financed, at least in part, by the sellers themselves. Offering seller financing puts the seller in a stronger position to get a better price and a faster sale.

Buyers nearly always need seller financing. Their advisors strongly recommend it. Seller financing acts like a bond for performance to assure that the seller will live up to the promises made to the buyer during the sales process. Seller financing is seen by most buyers as an indication that the seller has faith in the future of the business.

Buyers can expect, however, that sellers who offer seller financing must also act a lot like a bank! A buyer can expect to be asked to secure the loan and sign a personal guaranty.

What is Seller Financing?

Sellers of small businesses usually allow the buyer to pay some of the purchase price of the business in the form of a promissory note. This is what is known as seller financing.

Seller financing is particularly common when the business is large enough to make a cash sale difficult for the buyer (over $100,000), but too small for the mid-market venture capitalists (under $5 million). Seller financing is also common when the business, for any number of reasons, does not appeal to traditional lenders.

A rule of thumb is that sellers will typically finance from 1/3 to 2/3 of the sale price. Many do more than that. It all depends on the situation. Each transaction is unique. The interest rate of the seller note is typically at or below bank prime rates. The term of the seller note is usually similar to that of a bank.

For a service business which sells for $500,000, for example, the transaction might be structured as $150,000 down from the buyer and $350,000 in seller financing. The seller note might run for five to seven years and carry an interest rate of 8% to 10%. Monthly payments are the norm and usually start 30 days from the date of sale unless the payment schedule must be modified to allow for the seasonality of the business revenues. The seller note would also usually have a longer term if real estate were being financed.

When a seller offers seller financing, the price the buyer can afford to pay goes up as the amount of the down payment required by the seller goes down.

Why Would A Seller Offer Financing?

Sellers are nearly always reluctant to offer seller financing. Like all of us, they fear the unknown. Despite the advantages of playing bank, it is an uncomfortable role for them. They usually come around to seller financing only after some effort has been made to persuade them.

A seller’s first encounter on this issue might be with the business broker. In many cases, but not all, the business broker will bring up the issue. Most business brokers agree that sellers need to offer seller financing, but not all are willing to discuss the issue at the beginning of the listing. When the buyer is unknown, the seller’s fear of seller financing is greatest. Some brokers prefer to wait until the buyer prospect is known before suggesting the amount and terms of seller financing.

Offering seller financing up-front, however, can attract buyers and speed up the business sale. This is the major issue that usually persuades a seller to offer some type of financing.

Seller financing is seen by buyer prospects as comforting proof that the seller is not afraid of the future of the business. Buyers are more likely to believe a seller’s optimistic view of the business’ future when seller financing is offered. Some buyers can’t or won’t look at businesses for sale unless seller financing is a possibility. The more buyer prospects that look at a business, the better the chance a seller has to get an acceptable offer. A seller can also get a better price for a business that has financing in place. As in nearly all buying situations, buyers are often focused on achieving a purchase on terms that allow them to buy with as little ‘cash in’ as possible, even if the long-run costs are higher.

Seller financing can also lead to a speedier sale. If the seller plays bank, then the deal gets done more quickly. Applying for a bank loan takes a long time for some buyers, and the rejection rate for new acquisition loans is very high – sometimes as much as 80%! Banks also move much slower than sellers, even when they do approve a loan. A seller is more much likely to grant a loan request, approve a transaction, and close it as fast as the attorney can get the agreements prepared. Banks take anywhere from thirty to 120 days to approve and close a loan. There is also the possibility that the bankers will give the buyer negative feedback about the business, so that the buyer backs out.

A seller may also see tax advantages and profitability in seller financing, but these alone are not usually compelling reasons to offer seller financing. Capital gains from a small business sale can be reported in installments if seller financing is in place. This stretches out the capital gains tax into future years. Charging interest is also profitable. Sellers, however, are usually not as worried about tax liabilities as they should be until after the sale has taken place. They also usually believe they can get better interest rates from investments than from seller notes.

Why Should A Buyer Ask For Seller Financing?

Buying a business without seller financing is like buying a home without a home owner’s warranty. The seller note is a bond for performance. This is the major reason a buyer ought to ask for seller financing.

Beyond that, sellers have a strong motive to maintain the business goodwill if they have a remaining stake in its future ability to pay back the seller note. Without such an interest, sellers may choose to question the new owner’s skills and integrity. After a sale takes place, the seller and buyer frequently disagree about the future of the business. This disagreement is a natural outgrowth of their different positions and can become serious. If a seller note is in place, the seller has a motive to temper any irritation caused by the buyer with forbearance.

Even with a non-compete agreement in place with the seller, the fact that the business owes the seller a major amount of money may change the nature of the seller’s attitude. Instead of being indifferent or quarrelsome, a seller who is still owed money is more likely to be solicitous and genuinely helpful.

How Is Seller Financing Usually Secured?

Seller financing can be as creative as sellers and buyers want to make it. Most sellers, however, like to add security provisions in as many forms as possible. This can encompass personal guarantees as well as specific collateral, stock pledges, life and disability insurance policies and even restrictions on how the business is run.

The most common requirement is for a personal guaranty by the buyer and the buyer’s spouse. Sellers expect this. If a buyer objects, sellers immediately question their seriousness. A personal guaranty is not a specific lien on any particular buyer asset, but is the guaranty that the buyer is placing all assets at risk as needed to satisfy the loan. If the seller note payments are not made, the seller has to proceed with the long process of formal foreclosure. But, to satisfy the foreclosure, the seller will have access to all buyer assets. The spouse’s signature is required to prevent the transfer of assets to the spouse’s name to dilute the buyer’s net worth.

Specific collateral is the other common source of security. If no bank financing is involved, the seller wants a first mortgage on any real estate and first security agreements on all personal property involved in the sale. Sometimes, the seller will require that the buyer offer additional security in the form of additional mortgages and security agreements on real and personal property that the buyer owns. If a bank is involved, the seller must usually settle for second place in the line of secured creditors behind the bank.

A third type of security is the ‘stock pledge.’ The buyer is required to form a corporation and give the seller the rights to ‘vote the stock’ in case of seller note default. This allows the seller a speedier solution than foreclosure. If the terms of the seller note are not met, the seller can vote to require that payments be made and can even vote to replace management of the business. This threat is usually enough to guarantee seller note payments are not missed.

Life and disability insurance policies on key members of the buyer’s new management team are less frequently used methods of adding security to a seller-financed transaction. Term life insurance is available at rates which are relatively low, so this is most common. Disability insurance is used less often because it is more expensive. The seller will typically want the business to pay for these policies up to the amount of the seller note. These policies stay in effect until the seller note is paid.

Restrictions on how the business is run are sometimes added. These restrictions can be in the form of requiring that the new owner preserve certain account or employment relationships, that certain operating ratios of the business are maintained, that the new owner’s pay is limited, or that other important operating benchmarks are met until the seller note is paid. Most sellers won’t use this form of adding to their own security as a creditor. They usually readily identify with buyer objections to any controls placed on the new business owner.

How Can Both Buyer and Seller Benefit?

If you are a buyer or seller and this all seems a bit intimidating to you, take heart! It’s just as intimidating for the other party! Don’t lose site of the fact that this is just a normal transaction between two parties who must each benefit if a deal is to be struck.

Buyers are just looking for a fair chance to buy a job and a reasonable return on investment. They usually have modest goals about what they need to earn for the job they are buying. They are usually fair about how they define what they need to receive as a return on investment for the business risks they are assuming.

Sellers are mostly just ordinary people who once bought or started a business and now want to sell it. They want to get the most they can, but they have learned to be practical. They are usually persuaded by fairness and reasonableness. If not that, then they are at least eventually persuaded by the reality of what’s possible.

If you are a buyer, seller financing can offer you better terms and a friendlier lender. You will be able to buy the business quicker because you won’t have to wait a month for the bank’s loan committee to meet. There are no loan processing or guarantee fees and, usually, no invasive lender controls or audits.

If you are a seller, I would advise an early commitment to seller financing. It will save you a lot of time. You’ll get a better price because you’ll see more buyer prospects. There are many more buyers who can afford to take a chance when the admission price is reasonable.

Seller financing, properly understood and employed, can really benefit both buyer and seller.

Protecting Your Business Expert Center: Call : Rene’ P. Manfre for details 504-344-3317


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Evaluating The Value of Your Business !!!!!

Business Valuation is the process through which market participants determine the price they are willing to receive or pay in a sale of a business. The process is carried out through a specific set of methods taking into account numerous variables, and will ultimately estimate the economic value of an owner’s interest in the business.

The valuation process is a crucial step in selling a business as it establishes a baseline for a business’ worth to potential new owners. The first step in the valuation process is to establish the Type of Value that needs to be assessed. Without this step the wrong value for your specific situation may be calculated. Calculating the wrong type of value can cost you money and time. There are many value types beneficial to every business and we have included a few below. It is important to understand what each of these values describes. The most commonly used value type is the Market Value. This is most widely defined as the price at which a property would create a competitive and open market that would lead to the willing change of ownership between the buyer and seller. Other attributes of this value include having neither of the parties under compulsion to act and that both parties have reasonable knowledge of relevant facts. Another important and informative value is Investment Value. This value can be higher or lower than market value and is normally determined by a buyer when taking his/her own circumstances and personal factors into consideration.

If the buyer has a market advantage in your business’ industry, their investment value will be higher. However, a buyer could have limited capabilities in running a business, thus the investment value would be lower as their potential return is lower. Intrinsic Value can also serve an important role in the valuation process. This value measures the “true” value of a company or asset taking into account both tangible and intangible factors. It is important to establish what assets may hold higher intrinsic values than market values as they represent a greater benefit to potential buyers and can increase the salability and worth of your business. Enterprise Value is a helpful value type as well. This calculation reflects the value of the whole business including all claims, creditors, and equity holders of the company. By including debt in its valuation, enterprise value can serve as a more accurate representation of the cost to a buyer of a specific business. One more commonly used value is Liquidation Value. This value type is calculated through the sale of physical assets of the business such as land and equipment. This value is usually lower than other values due to the exclusion of intangible assets such as intellectual property and brand recognition. This is only a sampling of the different value types that can be measured in the valuation process. These values will commonly be used in tandem to establish the most accurate worth of a business under valuation. The second step in the valuation process requires the Gathering of Information that will affect and contribute to the overall value of the business. Every business is unique, thus there is no set standard that will determine the number of contributing factors and how much each affects the value of a specific business. Important data points can include everything from your financial statements to industry ratios for your business, and even the economic conditions of your local city and state.

It is of great importance to have a team of experienced individuals in business valuation gather and assess all relevant information about your business in order to most accurately determine the price that will create the highest amount of interest and overall benefit to you. Lastly, intangible benefits of the ownership shares being transferred must be calculated as to how they affect the value. Whether there is a sale of a minority or a controlling share of the business, assets such as voting powers or benefits of association with a business’ brand adjust the final worth of the shares being bought. This final step is called Ownership Specific Adjustments. After the valuation process it is crucial to begin identifying and informing interested parties. Through the valuation process a baseline price is put in place for your business’ worth to potential buyers. Capital Business Solutions already has a large network of buyers looking for every type of business. We can instantly create competition for your business that will lead to the best price for company. In the end, the best form of valuation is the price at which your business will be bought, and Capital Business Solutions can find the best buyer for you. On average our firm obtains a 20-40% higher selling price for our clients.

FREE CONSULTATION with Rene’ Paul Manfre (504)344-3317
Licensed and Certifications in: Business Valuations, Real Estate, Business Marketing Strategies, Insurance, Credit and Repair.

Business Buyers Sanity Check !!!

The Buyers Sanity Check !!!!!

1. How Much Do I Have to Put Down?
2. Will Cash Flow of Business Support Debt Service?
3. After Debt Service is Paid. How Much is Left To Live On?
4. How Soon Can I Get My Initial Investment (ROI) 1-3 years?
5. Does The Business Have Potential To Grow?

In the business broker community there is a review process that helps a buyer determine if a business purchase makes sense or not. This check can be done by a Fortune 500 company where everything is figured down to the penny and takes 1000 hours of research or it can be done by a small main street shop buyer who figures it out in 1 hour. Each item in this review process requires a decision. This decision can be based on extensive research or just on a reasonable guess.

The beauty of this process is; how long you want to spend on doing this activity is totally up to you. As we review this process, I will explain the variables of this system so you can make the necessary decisions where needed. Remember, this is only a tool to help you make decisions about a business purchase; it is not a sure-fire foolproof system. I will just lay it out for you and you make your own decision as to the validity of this formula for analyzing a business purchase that you may want to make.

The Sanity check requires two mathematical formulas, which require dollar amounts or other numbers to be entered in each formula. The math is calculated and then the results are compared against the purchase price. If it doesn’t work out the way you wanted, you have the option of then going back and change some of the numbers and do the calculation a second time.

The two formulas are:

1. SP + WC – BF = CR

Sale Price + Working Capital – Borrowed Funds = Cash Requirement

2. SDE – FMW (FO) – DS – ROI = Extra Profit/Loss

Sellers Discretionary Earnings – Fair Market Wage (for the owner) – Debt Service – Return on Investment (Cash Requirement x Interest rate -Stated as a Percentage) = Extra Profit/Loss

Since each item in the formula needs to have a dollar amount determined, we will define the terms and then discuss how the dollar amount is derived at.

Terms Definition:

Sale Price: The price that is being asked for the business or the price the buyer is thinking of offering. Depending on when you do this analysis. If you are trying to determine an asking price you would calculate all the other numbers in these two formulas to determine what should be your offering price. We will do examples to make this clear later in this article.

Working Capital: The short-term assets minus the short-term liabilities is the accounting definition. The simple explanation would be the amount of money necessary to be invested by the buyer to run the daily operations of the business, once purchased. This would include monies tied up in inventory, and accounts receivables. Money invested to pay the landlord’s or utility company’s deposits. Also included is the money spent on the business purchase to cover the loan origination costs and purchase escrow fees when buying the business. It is the total funds invested into the business to keep it running. The down payment given to the seller is not part of this number, since it is included as a separate item.

Calculation notes:

1. Cost of inventory: $_________________ (+)

2. Accounts receivable: $_________________ (+)

3. Landlord deposit: $_________________ (+)

4. Utility Deposits: $_________________ (+)

5. Escrow fees to purchase: $_________________ (+)

6. Loan origination costs: $_________________ (+)

7. Short term liabilities* $ _________________ (–)

Total Working Capital $_________________

* Short-term liabilities are defined as liabilities that are to be paid off within 1 year – accounts payables and the part of any notes payable that are to be paid within 1 year.

Borrowed Funds: The loan made for a business purchase from a bank or private party. The private party can be the seller or some friend or relative who might be willing to make a loan. This is borrowed money that must be paid back to someone at some time in the future.

Cash Requirement: This is the invested cash required to both buy a business, and working capital-to run the business. The amount of cash needed to make the business purchase and run the operations of the business after deducting all borrowed funds, regardless of source.

Sellers Discretionary Earnings / Owners Total Benefits: This is the total of all the non-business related benefits going to a business owner or his family on an annual basis that have been paid for, by the business. Included in this is definition are taxable profit from operations, unreported cash income, owners salary, salaries to non-working family members, any amount over the fair market value of salaries paid to working family members, family auto expenses, family telephone, family office expenses, health and life insurance for any or all family members, pension plan/ profit sharing contributions paid for the benefit of family members. This can also be stated as the reason why most people go to work everyday; they get family support for working.

Calculation notes:

1. Taxable profit from operation $_________________ (+)

2. Cash $_________________ (+)

3. Owners Salary $_________________ (+)

4. Salaries of non-working family members $_________________ (+)

5. Amount over the fair market value of wages

of working Family members $_________________ (+)

6. Family Auto Expenses $_________________ (+)

7. Family Telephone Expense $_________________ (+)

8. Family Office Expense $_________________ (+)

9. Health and Life insurance of

Any/all family members $_________________ (+)

10. Pension plan/profit share family members $_________________ (+)

Total Seller Discretionary Earnings: $_________________

Return on Investment: We need to have this stated as a dollar amount in Formula two. ROI is calculated as follows:

Cash Requirement X “a Percent” – the greater the risk, the higher the percent

First we must determine what the interest rate return we wish on our investment. This is a very subjective percentage and a change in this number can change the whole result of this analysis. If it is of any help, many financial investors in “Corporate America” feels they need to get a 20% return on their invested capital. Companies do not always make money and therefore the possible loses are built into the ROI. Some of the reasons are: companies are bought and go broke, overseas competition causing expectations of growth and income not to be met, and lastly government regulations periodically close whole industries. These are just some of the many risks involved in owning a business.

Putting your money in a bank has little risk, because the Federal Government insures your deposits in the bank. The stock market has a lot of risk that many people do not fully understand, causing them to accept a long term ROI of 10-13% from mutual fund investments. A 95% drop in stock prices like the stocks or what happened when we had the oil embargo in 1992 are indications that the stock market can be a much higher risk than people realize.

I personally feel that owning your own business and buying real estate are much lower risks, providing a much higher return. The proof of this can be found in the number of people who got rich in real estate and the over 25 million small business owners across this country.

Figure out what ROI you want and insert this number as .20 amount to represent 20% or .06 to represent 6% ROI. This is an annual return on invested money.

Once you have a percentage return on your investment we need to multiply it by the Cash requirement in order to come up with a dollar amount return needed. This restated is Dollars invested x percentage (stated as a decimal) = Dollar return on investment.


1) Investment of $50,000.00 @ 6% Return On Investment (ROI) would be calculated as follows: $50,000.00 X .06 = $3,000.000 (Dollars return on investment)

2) Investment of $50,000.00 @ 20% Return On Investment (ROI) would be calculated as follows: $50,000.00 X .20 = $10,000.00 (Dollars return on investment)

Debt Service: The reason we need this number is because this is a financial expense of owning a business. It is not an operating expense of the daily business operations but if you have debt, in your business, you must be able to make the payments, out of the business operations profit. Usually this payment is mostly interest and a smaller portion is the principal reduction of the loan balance.

Most professionals deduct the whole payment when doing this analysis, because the business must generate enough profit to make the whole payment. My personal preference is to just deduct the interest portion and to add the principal portion of the payment to working capital amount needed. This counts as more money being put into the business just like financing inventory and/or accounts receivables.

For simple one-hour analyses it is not worth splitting up the payment. In the case of a very large principal reduction payment it could be unreasonable to not split it up. It is up to you. You can always try it both ways, since this is a process to raise your understanding, not to come up with a fixed answer of, yes! it is a buy or no! it is not a buy.

Fair Market Wages: This is an amount that the new or old owner would be paid, if he were an employee not the owner. If the owner were the company salesman and also the company bookkeeper working a total 60 hours a week, a reasonable salary would have to be determined for each job. As an example only, lets say that an outside salesman, in your industry, could make $40,000 per year. And a bookkeeper usually charges $15 per hour. The salesman might very well work 50 hours at this job to earn this salary. If a bookkeeper would work 10 hours per week doing the bookkeeping that would mean 520 hours per year (10 hours x 52) times $15.00 per hour which comes to $7800 per year for the bookkeeper. The two Fair Market Salaries would come to $47,800 ($40,000 + $7,800).

Sometimes the market salaries are not so easy to figure. Lets take an owner who owns a 99-cent discount type store. This shopkeeper works 70 hours per week behind a counter in the store. You can hire a counter person for $7.00 per hour so this becomes (70 hrs x $7.00 per hour x 52 weeks).

Then you start discussing that this $7.00 per hour counter person would not be able to do the buying. You might want to figure a purchasing agent’s salary. This can be done or you can just do simple numbers, leaving the salary only based on a counter person’s wages.


By now you have the information to come up with numbers to put into the formula. Let us create a scenario. This was a transmission shop. The customers pay COD-upon pick up of the car. The parts inventory is from old transmissions and show on the books as worth nothing. The seller-owner is asking $75,000 for this business that he is able to takes out $50,000 in profit or benefits. In an interview, the owner mentioned that if a buyer will put $40,000 as a down payment he would carry the $35,000 balance at 5% interest for 5 years. By observation, we can see that the current owner sits in the office and does the bookkeeping, orders parts and makes bank deposits. He has a manager who bids jobs and handles production. No one is going out and calling on prospective business, which is one thing the owner should be doing with his time, but he is not doing. Lets go through what the numbers are with this example.

Math Formula #1: Sale Price + Working Capital – Borrowed Funds = Cash Requirement

Sales Price: $75,000
Working Capital: The business requires $10,000 cash infusion upon close of escrow, mostly to pay the landlords deposits and start a new marketing campaign.
Borrowed Funds: $35,000
So, the calculation for formula #1 looks like this:

Sales Price: $75,000

Working Capital (+) $10,000

Borrowed Funds (-) $35,000

=Cash Requirement: $50,000.00

Math Formula #2: Sellers Discretionary Earnings – Fair Market Wages For Owner – Debt Service – Return on Investment (Cash Requirement x Percentage) = Extra Profit/Loss

Seller Discretionary Earnings in this case is, let us say, $50,000.00.

Fair Market Wage: You can calculate what you consider fair or you can put all of the other numbers into the equation and see what is left for salary. If you like the salary you buy the business, if not you do not. If we were to calculate what the owner’s salary should be I would not pay much for what he does. Even though he puts in 50 hours a week he really only works 15 hours a week of true production. I am figuring 5 hours for bookkeeping and banking and 10 hours for ordering parts and answering phone calls. At $15.00 per hour he is earning $225.00 a week ($15.00 x 15 hours) and that multiplied times 52 weeks comes to $11,700 per year.

Debt Service: My financial calculator says that if you borrow $40,000 for 5 years (60 months) at 5% and the balance at the end of the 60-month is zero, the monthly payments come to $660.49. Since the formula requires yearly figures we multiply by 12 and get $7,925.92. Most of this payment is principal reduction but we are going to just deduct all of the payment as is generally accepted in the industry.

Return on Investment: We are going to use the 20% figure we discussed above. Formula one determined that $50,000 was needed as an investment which is multiplied by 20% (.20) = $10,000 per year return on investment.
Formula #2 (Sellers Discretionary Earnings – Fair Market Wages (For Owner) – Debt Service – Return on Investment (Cash Requirement x Percentage) = Extra Profit/Loss) would the look like this:

Seller Discretionary Earnings: $50,000.00

– Fair Market Wages: $11,700.00 (-)

– Debt Service: $ 7,925.00 (-)

– Return on investment: $10,000.00 (-)

= Extra Profit/Loss: $20,375.00

This means that after deducting from the income, wages, financing costs and a return on your cash investment the business still generates $20,375 more profit. Now would you buy this business under these circumstances? It would appear, yes! Of course this is based on a few assumptions, which might not be true. Lets look at them again.

The owner is only working 15 hours a week or he is only doing 15 hours of real work even though he is sitting around all day. The other assumption is that a 20% return on your investment is a sufficient return for the risk.

We can also consider that if the new owner puts in an extra 25 hours a week doing productive sales the business should be able to afford to pay him another $20,375 for the first year. It would appear that if the sales work was done then the profit should greatly increase in the second year or maybe even the second month.

This is a tool to help you analyze a business. It is not the end-all of a business appraisal or evaluation. Just a tool to help increase your understanding of a business’s value that you may be seeking to purchase. Have fun with it.

Rene’ Paul Manfre is an Investor, Business Broker, Business Owner, Louisiana Real Estate/ Business Broker Consultant,Financial Distress Consultant, Well known Public speaker and Administrative/Business Consultant. He can be contacted at his New Orleans office by calling 504-525-1717 or by e-mail at See other article by Willard at

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What Should Everyone Know About Mergers And Acquisitions?

Let me take a stab at some perhaps less obvious things to know about M&A (from the perspective of a start-up founder at least):

•Companies don’t buy start-ups. People do — CEOs and SVPs. There are 1,000 companies Google GOOG -0.02% or Apple AAPL -0.67% or Salesforce or Facebook FB +1.28% or Oracle ORCL NaN% or whomever could buy, that all could make strategic sense. But that’s not how M&A happens. It’s when a CEO sees a strategic gap in the future, or a VP sees a gap in what he/she can get done in the next 12-18 months — and fills that gap to with a deal, right or wrong.
•VC multiples drive deal prices. Many deals are sort of valued off financial metrics and comps, but the actual price is often based on what would “clear” the VCs — maybe 2x for the late-stage VCs (see Instagram, Yammer, etc. acquired at 2x last round price), or 3-4x mid-stage VCs. Corporate M&A departments and others are OK with this because it’s a process and this is what it takes to “clear” seemingly good deals.
•M&A is Capricious. Because M&A is driven by individual executives at companies, not companies per se … it’s capricious. Especially at the non-CEO level. Priorities change. You may be just as good a strategic fit in 12 months, but if priorities change, that offer may never come back. In fact, it likely will only come once per individual potential acquirer unless you are Twitter, Facebook, etc.
•You Have to Stay. M&A isn’t a one-time cash-out, at least not anymore. Most deals have 2-3 year retention, vesting, and re-vesting programs, and potentially 2-3 year earn-outs. Assume if you get acquired, you’re committing at a minimum to 24-36 months at the acquirer.
•No One May Care That Much in 6-9 Months. You have to make hay after you are acquired. Everyone at the acquirer will have their eyes on you and want to help — at first. Then, they’ll acquire someone else, and attention will go there. You’ll have to make it happen and continue the momentum yourself.

1. M&A is a tactic to execute strategy. It is not the strategy itself : Companies need to have a clear, well-defined strategy for their specific business vertical As part of this process, the business leader (typically the CEO or VP) needs to consider all possible alternatives: Build in-house, License, Partner, Co-invest, Acquire, etc., and come to the conclusion that a specific acquisition is the best way to go.

2. There are 2 primary motivations for companies to make acquisitions:

(1) Fill a strategic gap in the company’s product, resources (people) and capabilities
(2) Help the company enter a new market [preferably with a revenue stream]
All other reasons [economies of scale, reducing taxes etc] are secondary.

3. Financially Viability is as important as Strategic Fit: It is critical for the deal to make financial sense. In a simplistic model, most acquirers will model the Base case [Revenue/MSS/Net income with both companies as separate entities] and the Acquisition case [Revenue/MSS/Net Income upside due to synergies after cost of acquisition/integration].

4. Knowing the “Value Drivers” of the deal is a critical element to success. The acquirer will spend a huge amount of due-diligence effort to identify the sources of value (Intellectual Property, People, Brand, etc) from the deal. It is essential for the acquirer to structure the deal and the resources to maximize these value drivers, and to financially model DCFs based on these value drivers.

5. More than half of all M&As fail: Research indicates that the failure rate (as measured by creation of post-merger financial value) is > 50% . Some obvious key reasons are: High valuations, lack of well understood value drivers, cultural misfit etc.

6. Employee turnover in target companies is usually high in the years after the merger; hence the need for retention programs for the key employees who drive the sources of value.

My top reasons based out of some basic research from experienced leaders in the industry.

This question originally appeared on Quora. More questions on Mergers and Acquisitions:
•Why are there (seemingly) so few mergers between startups?
•Is an acquisition always a failure?
•Why do the Founders leave after their companies get acquired?

by Rene’ Paul Manfre

Hiring a Business Broker! Why?

If you are contemplating the sale of your business, give yourself time to gather information and understand what actions you can take now to adequately prepare for this life-changing event. Many business owners underestimate the complexity of a business sale. After all, they understand their business but often have no real idea of what it is worth. They find a buyer, exchange funds, and, voilá! The deal is done.

Not so fast. Most FSBO’s, or For Sale By Owner, tend to either underestimate or grossly overestimate the value of their business. For those FSBOs who had no trouble at all and sold their business within months of offering it for sale, chances are they sold their company at thousands of dollars below what it was truly worth. If the deal was not structured properly, they may unwitting leave themselves legally exposed, an oversight which may come back to haunt them in the future. FSBO’s who are unaware of the true value of their business run the risk of selling their company to a bottom-feeding buyer who will utilize great negotiation tactics to obtain favorable terms and a great purchase price. This wise buyer did not want to give the business owner time to realize he was selling the golden goose! After shrewd negations, a take it or leave it offer was made, the business changed hands, and the new owner laughed all the way to the bank.

Then there are those FSBOs who languish on the market with businesses offered for sale at twice the actual value, wondering why no buyers are showing up to knock on their doorstep. In the meantime, the employees start to leave, one by one, worried about the impending sale, or non-sale, worried about job stability, about new management, etc. The owner is putting so much time and effort into the sale of their business that the business itself begins to suffer, revenue declines, morale suffers, and overall company value drops even further. Not a good plan for selling a business.

Selling a business takes some up-front preparation time. First, it is important to be realistic about the sale price of a business. Investing a little time and energy up-front can keep thousands of dollars in your pocket later on. A well-documented business valuation not only takes into account assets and income, but ideally should carefully consider market forces and expectations. Find a firm that is actively involved in the day-to-day business of business sales, preferably an advisory-type Merger & Acquisition firm, to provide you some guidance on business valuations. While accounting firms may also provide business valuations, they often do not have an in-depth understanding of market forces or industry trends. A detailed business valuation will also point out what drives the value of your business, allowing you to shift resources as needed to grow your business value prior to a sale. Growing your business value and properly positioning your business on the market is crucial for getting top dollar later on.

Armed with a realistic price for your business, you may then decide if you wish to handle the sale on your own or hire someone to help you with the sale. Again, knowledge is power. Find out what it takes to successfully sell a business. Talk to your trusted professionals. Call around. The ideal situation would be to find an advisory firm that will explain the importance of confidentiality, a good a controlled process, properly screening for qualified buyers, the importance of thorough due diligence, not only in uncovering what makes your business tick, but also to protect yourself as the current owner from future liability. Confidentiality is also key. You don’t want your employees or competitors to know that your business is for sale until it has changed hands. Too often, in their eagerness to sell their business, owners do not know how to properly screen potential buyers. Even when they are careful about screening buyers, they may not possess the experience to accurately interpret and analyze a buyer’s true intentions until it is too late. The dangers are obvious: from unintentionally giving away company secrets to competitors to having your private company information floating around town, the importance of confidentiality cannot be overstated.

Take a good long look at your time resources. As a FSBO be prepared to dedicate 10-15 hours per week to the sale of your business, from advertising, seeking out potential buyers, carefully screening them, understanding tax implications, deal structures, due diligence, negotiations, legal ramifications, as well as continuing to run and complete all of the tasks and duties of operating their business. If these tasks, required expertise, and experience appear overwhelming, then perhaps a FSBO is not the way to go. If you prefer to find a professional firm to handle the actual sale for you, again, a Merger & Acquisition type firm that will function in an advisory capacity may be your best bet. They are experienced in providing advisory services and providing extensive extra resources for their clients. How will you know if it truly is an advisory type Mergers & Acquisition firm? Some groups may want to try to get your business at the expense of overpricing it or telling you that they can sell it in 2-6 months. If you find a firm that tells you what you want to hear and not what you need to hear than turn around and walk out the door. If you speak with a firm who clearly and realistically presents extensive information and explains your different choices along with the likely outcomes of each, perhaps even telling you something you did not want to hear; stop, listen and ask more questions. Chances are the second firm that explains the options and the different paths open to you and your company may be the right way to go.

by Rene’ Paul Manfre