6 minute read

Using a Broker to Sell Your Business to a Friend or Family

A few years ago, a business owner called and said, “I want to sell my business and I know who I want to sell it to. And I want to hire you to sell it for me”. The short version of this story is: he did and I did.

Many times, owners have identified prospective buyers who might want to purchase their businesses. However, they aren’t sure how to approach these prospective buyers, begin the conversation, and complete the transaction. This is a story of how some owners get that done.

Sam was ready to retire and none of his children wanted to take over his business. He had some options. He could shut down the business, but that didn’t make sense to him because it was profitable and successful with a good customer base.

And like most owners, Sam wanted his business to endure and provide jobs for his long-time employees, and to continue serving the community. He spent years building his company and was proud of it. Also, selling the business was part of his retirement plan, as it is for most small business owners.

Knowing a Good Candidate with the Right Qualities

He knew about the services offered by business brokers and understood the timeframe and uncertainty of locating an unknown buyer in an uncertain timeframe. He also knew about the possibility of selling the business to an associate, friend, or competitor. In this case, Sam had identified a good candidate that, for him, was the ideal buyer.

Over the years, Sam maintained a mentor-like relationship with a friend of his daughter. This particularly young man, Kurt, possessed the right qualities and experience to own a business. In fact, Kurt was a General Manager at another local company----a company that Kurt had unsuccessfully attempted to buy in the recent past. Kurt was smart, motivated, and ready for the right opportunity. However, there was one major obstacle; he had no money for a down payment.

While the owner, Sam, was willing to offer seller financing for a good portion of the purchase price, some cash was required to pay off existing company debt and cover business selling costs. To solve this problem, Kurt’s father offered to “partner” with Kurt and use the Roll Over Business Start Up Program (ROBS), which allows individuals to access funds, on a tax-deferred basis, from a retirement plan for the purpose of buying a business.

The Broker’s Role in Making It a Done Deal

What was my role in this process? It was the same as in any buy/sell transaction with one important difference; the time to find a buyer was eliminated! I provided the same business brokerage services to the seller and buyer as offered in a “normal” buy/sell transaction where the buyer is unknown and the timeline is uncertain.

As the business broker, here are the steps I followed:

• Prepare a business valuation to establish a “floor price” for the seller and to support the asking price during negotiation.
• Prepare the Confidential Information Memorandum (CIM) detailing company history, financial performance, SWOT analysis, and cash flow of the business. The CIM functions as the “prospectus” for the business and provides enough details for the buyer to analyze and make a purchase decision.
• Obtain buyer’s signature on Non-Disclosure Agreement prior to sharing any confidential business information from the seller including the CIM.
• Guide negotiation between seller and buyer regarding purchase price and deal structure.
• Facilitate execution of Purchase and Sale Agreement (in some cases this may be a Letter of Intent).
• Introduce the buyer to third-party lenders, as needed. {In this case, the seller ultimately offered financing so there was no outside lender}.
• Introduce the buyer to ROBS program providers.
• Establish timeline of key important dates and provide to all parties.
• Manage and monitor the buyer due diligence process.
• Work with landlord, buyer, and seller to get new lease agreement for buyer.
• Prompt seller’s attorney to draft seller note, security agreement, bill of sale, UCC financing statements, and other closing documents.
• Follow up with all parties and keep process moving toward targeted closing date.
• Schedule closing with escrow agent.
• Review final closing documents and close the sale!

The Biggest Differences in Having a Known Buyer

What were the biggest differences between this buy/sell transaction and the traditional process requiring a search for an unknown buyer with an unknown timeframe? It was easier due to the existing relationship between buyer and seller. It was faster because the transaction closed in about 90 days from start to finish.

“Normal” transactions can take on average, according to BizBuySell, about nine months from the time the business goes on the market to the closing day. And this is the average! I’ve experienced a situation where it took almost three years to sell a profitable, growing business in a good market.

Some businesses don’t sell at all because owners have unrealistic price or deal structure expectations for the current market. Or, they fail to provide the information needed by the buyer to make a purchase decision. Sometimes they don’t sell because the owner gets inadequate guidance on the buy/sell process.

Finally, this transaction was less expensive for the seller. How? The selling costs were lower because the brokerage fee was discounted. How does that work? Well, it’s the old “bird in the hand is worth two in the bush”, having a certain outcome guaranteed is better than the possibility of perhaps getting something better in the future.

Or, said another way, it’s the time value of money. Business brokers generally work on a contingency fee basis. Having a better than 80% chance of closing a transaction is a good reason to offer a discount, getting to the closing table sooner rather than later, or in some cases not at all.

As a business owner you may believe that one or two of your key employees, a trusted business associate, a long-time friend, or another local business owner may make the perfect buyer of your business. And you may be absolutely right!

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