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How to Sell a Small Business FAQ | Coronavirus Update May 14th

How to Sell a Small Business FAQ | Coronavirus Update May 14th

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Posted by Ian H., CEO

May 15, 2020

May 14, 2020 quick update

The

Johns Hopkins CSSE dashboard

is reporting 4,434,590 confirmed global cases, 301,370 deaths and 1,583,929 recovered worldwide.

In the US we are seeing a confirmed 1.41 million US cases and 85,581 deaths to date with 246,414 recovered as of 3:34pm on May 14. 

WUHAN PLANS FOR WIDESPREAD TESTING

In the news, Chinese officials have outlined the plan to implement

widespread testing of Wuhan’s 11 million residents

following the recent detection of a cluster of COVID-19 cases. The

plan is scheduled to be completed in 10 days

, an unprecedented scale for SARS-CoV-2 testing in any country. Wuhan authorities would still need to conduct at least 730,000 tests per day to meet the 10-day timeline. Companies developing testing kits are reportedly rushing to meet the sudden high demand.

 

JAPAN LIFTS STATE OF EMERGENCY

 

Japanese Prime Minister Shinzo Abe

announced that Japan will

lift the state of emergency

in all but 8 prefectures, based on assessments that COVID-19 incidence is slowing and testing capacity is increasing. 

WISCONSIN SUPREME COURT OVERTURNS “SAFER AT HOME” ORDER

 

The

Wisconsin Supreme Court

ruled yesterday that the state’s “safer at home” order, issued by Secretary of the Department of Health Services Andrea Palm, was issued

outside the scope of her authority

. The decision largely canceled the order with immediate effect, which permitted businesses to reopen and removed prohibitions on large gatherings. Schools were not impacted by the order. Following this decision, some

restaurants and bars reopened

, some of which did not impose any social distancing or other protective measures. You may have seen some of the photos online as customers flocked to bars. 

Researchers at the University of Pennsylvania discovered that the simple act of speaking can emit small droplets that linger in the air for at least eight minutes and potentially much longer, according to a new study. This could help explain why covid-19 cases cluster in places with poor air circulation, such as nursing homes, households and cruise ships.

It also shows why face coverings are so important to prevent the spread.

Read about the study and what scientists are saying about its implications for covid-19.

 

May 14 Topic: Looking to buy or sell a home service business? Why now is the time.  

Special Guest: Bob Chalfin

CPA, lawyer, professor and the CEO of

The Chalfin Group Inc.

Bob Chalfin shares the most frequently asked questions about selling a small business. As a home service business owner, whether you are considering selling your business now or sometime in the future, keep these tips in mind and learn what mistakes to avoid when selling your small business.

When should I start preparing for the sale of my business?

  • As a business owner, you should think about potentially selling your business since the first day you start or buy your business. Eventually, you are likely to sell your business whether voluntarily or involuntarily. It’s beneficial to have a plan in mind and be prepared for future situations.

  • These are some good questions to think to yourself: who are your suppliers, key employees,and who will take over your business if anything happens to you? Think about those information early and learn what makes your business valuable? What makes your business valuable is the MRR, or monthly recurring revenue. Big businesses all have significant MRR, and this is what makes your business valuable.

  • There are ways to start building MRR in your home service business such as maintenance plans and recurring service plans.

How long does it typically take to sell a business?

  • It generally takes 8-12 months to sell a business, but you should start planning for it 1-2 years in advance. Be sure to have your customer contracts and legal documents in place and conduct a strategic analysis as a preparation step. Ask yourself, what happens to your key employees and that happens when your key employees leave the moment you sell? This could cause your business value to plummet if your key players decide to quit right before or during the transition.

  • Due diligence needs to be done and there is a lot of prep work

  • Buyers don’t expect a perfect business, but the more that you can offer the buyer the more you will get when you sell it.

  • Ways to think about buying another business to build your leverage: look horizontally: geography, other industries to expand services and ook vertically: competitors in your area

What can I do to keep the process confidential?

  • Privacy is the top concern. Make sure your email is protected and not easily accessible to other people. Same thing applies to your voicemail, cellphone, credit card, and FAX machines. Sometimes, the biggest culprits are your own attorneys and CPAs who provide itemized invoices. So be sure to Let them know you are looking for strategic alternatives for business growth

When we spoke with Mark Cuban he talked a lot about creating wealth and one of the keys to this is that you need to own a piece of an asset because it grows. Do you see many companies coming to you that have given key employees a percentage of the company in order to create ownership across their people? 

  • Yes, and there are several ways to share ownership such as stock, stock options, phantom stock, and employee stock ownership plans.In companies where key employees have ownership, they generally do better than those that don’t.

What should I do if the potential sale of my business is inadvertently disclosed?

Lets say key employees have been w comp 10 yrs, and the owner comes to one of the employees to purchase the business. How do these deals look from an exit strategy? 

  • If an employee can get the financing then it can happen. There are a number of ways this can happen and it really depends on the individual situation. One way to facilitate this gradually over time is through an ESOP, Employee Stock Option Plan. 

PRO TIP: Bob recommends that the seller remain with the business for 6 months or longer in order to ensure they are incentivised to ensure the success of the business even once they are gone. 

What should I do to start the process? 

  • Start by having an initial consultation and look at your financial and customer data. Have an attorney evaluate your corporate information, loans, contracts, and other important documents. If you are a franchise, your franchise agreement might or might not let you sell. 

  • Also, think about documenting what your business model is. That is, what do you do in January, February of each year, and what insurance policies do you have? Evaluate your employee agreements, non-competing agreements, and keep in mind that not all agreements are valid in every state. 

  • You should continue to invest in your people, advertisement, equipment, and your business in general.

    If you don't know how to run your business, you don't know how to sell your business

    . Run your business properly, and let a professional help you sell your business, because chances are, you will not excel at doing both at the same time. You still need a good business to absorb the acquisition. 

What is the selling memo and when should I start working on it?

  • One pager information with all of your business information, but keeping your business name confidential for now. Then send this information to your potential buyer and have them sign a non-compete agreement. From there, you can start preparing a selling memo that contains projections, financial data and competitor profile. If the buyer is interested, then they will give you a letter of intent that usually goes through 3-4 changes before the final signature from both parties. The letter of intent is signed by both parties, and you need to have a monogamous relationship with the buyer for a certain amount of time. Under this effective period, the buyer has an advantage since you can no longer sell your business to another buyer. 

  • Before signing the final contract, you can also have an indication of interest, but this usually applies for larger deals and not smaller businesses. 

What is due diligence? How long can that take?

  • Due diligence includes corporate records, financial records, customer records, and all of this information is usually hosted on one drive with password protection. When items are in due diligence, you definitely want to keep privacy in mind and limit those who can access this important information on the buyers side. Only the key players and HR employees should have access. On the other side, you should keep a permanent record of all the information you provide the buyers, in case issues come up in the future. Documenting everything is the key.

What are some common topics covered during the initial meeting with the buyer?

  • Have a selling memo that gives everything that buyers need. The buyer will want to know who your biggest buyers, suppliers, and key players are. It might be extra helpful to provide an organization chart of your business to your buyer.

What are some documents that a potential buyer will request?

    • Certified audit

    • Financial statements

    • Tax returns

    • Employee contracts

    • Customer information

What are some key metrics that I should review with the buyer?

    • Revenue growth year over year

    • Profit growth year over year

    • Gross profit

    • Cash flow - might be a more important key metric to take into account

    • Sales per employee

    • Profit per employee

    • Acquisition cost

    • Operations, selling assets, and borrowing money 

    • Hours each employee's bill? How profitable is each employee? Are any of the employees related to each other?

    • Personal items are taken out of the business (cars, vacations, baseball tickets)

    • Receivables and how tough it is to collect receivables. If it’s tough, means business does not screen customers and is not satisfying customers

What should I do regarding my employees?

  • It’s your choice to communicate your employee situation to potential buyers. It is helpful to have buyers meet with your key employees before the transition. These are good topics for buyers to talk to employees about:

    • Whatever you say is confidential

    • You don’t need to prep a powerpoint to present anything 

    • This is not a job interview, you have a job

    • Ask the employees if it were them buying the business what would you do if you ran the business?

  • Some employees will resent you for buying a business, and this is understandable. As a business owner, you simply can't satisfy everyone, but as a responsible leader, you should have the conversation with your employees ahead of time and let them know that the buyer will take care of them. In some cases, the buyer will even offer the employees a bigger and better room for growth in their career.

What are some standard formulas, algorithms, and methods that are universally utilized to value a business?

  • People look at comparable sales, price earning multiples, discounted cash flow. You can also take the revenue multiple into consideration, but the problem is that it doesn’t clearly show you what you are earning from the business. Here is a simple reality check method: look at cash flow for the next 10 years and determine how much of the loan you can pay off from a cash flow. 

Who should draft the contract?

  • The letter of intent is drafted by the buyer, and the contract is drafted by the buyer’s attorney. As a business seller, you still need to hire your own attorney/CPA and make sure to keep them involved in the selling process on your side. 

What are some common mistakes made by sellers?

  • Wrong timing, not selling at the right time

  • People. Refusing to take employees into consideration

  • Not using the right advisors

  • Not creating an auction. You need to speak to more than just one buyer to get a better idea of the bigger picture

  • Not preparing properly and waiting until the last minute to sell. Make sure you’re not running out of cash and would take any offer at the door. If you’re a forced seller, the value will go down.

Questions from Audience

  • I’m literally signing the docs for my EIDL loan right now. What impact will this have on the future of selling the business?

    • Depending on how deal is structured, it may have to be paid back at time of sale

    • Depends on individual circumstances, reach out to Bob. 

  • Does buying vehicles help with the sale of a business? I’ve heard mixed advice

    • If I’m buying a business, I want to make sure I get everything I need to run the business.

    • Even though vehicles are depreciating assets? Yes, that’s just an accounting function and you have vehicles that are running that have fully depreciated according to your books. 

  • How do you put a price on a customer base?

    • It’s not valued separately, its reflected in the cash flows that the customer base generates for your business. 

    • Value is based on future cash flows the business will generate.

  • What are industry norms on multiples of this cash flow?

    • This is really a case by case scenario and depends on numerous factors 

    • How much is monthly recurring? How much is one time incidences?

  • How do I swell a business with my name in the business name? I did it to leverage the fact that I’m a female contractor since most of our jobs are booked by women, am I ostracising men from buying my business?

    • You want to keep the same culture in the business, and maybe you want to expand a bit but no you don’t want to change it.

  • I was in the midst of a settlement agreement with my former franchise when COVID-19 hit and it went on hold. Any advice of leveraging the environment 

    • Discuss this with your attorney.

    • One key opportunity right now is that you could think about do you want to do business with these people in the future? How can you change it to make it better for everybody.

  • If our Pros were to do one thing tomorrow, what would it be?

    • Operate your business like it won't be sold and what can you do to encourage your customers to want to continue to do business with you

    • Think about what can you do to give back to those that are really suffering 

Don’t Forget to Join Us Online

Don’t forget to join your regional meetup and learn more about how to navigate this crazy time, with marketing, sales and operations tips. 

Network with other professionals in your area and receive a $15 Grub Hub gift card, just for participating. Register today! 

Keep Your Industry an Essential Service

We’re making it easy to write to your government representatives and send them a letter urging them to classify your industry as an essential service during this time of uncertainty.

https://www.housecallpro.com/essential-services/

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Legal disclaimer

Housecall Pro is offering the Coronavirus Evening Update for Home Service Businesses for informational purposes only and to foster thoughtful communication and discussion regarding the COVID-19 pandemic; Housecall Pro is not offering advisory services or otherwise advising or representing any members of the group invited to participate.  Housecall Pro is not offering legal, medical or other professional advice in the Coronavirus Evening Update and makes no representations or warranties regarding the content of the Coronavirus Evening Update.  Participants should obtain independent advice relating to their businesses and their particular circumstances.

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