Where you go to buy or sell a business…..

I’ve owned my business brokerage firm for a long time.  I’ve seen a lot of others go in and out of business.  I’ve heard a lot of bad things about business brokers and read a lot of useless tips on how to pick a good one.  So, I’ve decided to compile my own list of the top 4 things to be careful of when hiring a business broker.

1)  Beware of Business Brokers that charge SUBSTANTIAL up front fees (continue reading this point!) -  Up front retainers are NOT a bad thing.  We charge one.  But it is VERY small relative to the TOTAL fees we charge for selling your business.  As most good brokers do, we put our money where our mouth is in terms of our ability to sell your business.  We take 99% of the risk that we will SELL your business.  We expect you to take the last 1% so we know that you’re serious.  Having a little “skin in the game” as the seller is a good thing.  It shows us that you’re not just shopping us for offers to gauge your market value and it shows us that selling your business a priority to you.

The problem arises when a broker requests that you pay a substantial portion of their free up-front or in up-front monthly installments.  For example, there is one business brokerage company that has crept up asking for $10,000 a month payments for each of the first six months.  Think about that this way; if their fee is $100,000 in total and you’ve guaranteed them $60,000, what is their incentive to earn the other $40,000?  They can go out and make more money buy signing up another business.  Selling your business is the harder of those two tasks and now it pays less than a new listing!  Unfortunately, the motivation of these brokers is not to sell your business.  Their motivation is to list as many businesses as possible and earn as many $60,000 fees as possible.  You will probably get a nice marketing book / presentation from them in return.  But, you won’t get your business sold.

2)  Beware of Business Brokerage Firms that are NOT local – Firms with offices in large metropolitan areas such as New York, Los Angeles, Dallas or Atlanta (but not in your local area) are not worth your time, money or effort.  If they are not in your community, you should not be their client.  Buyers for small businesses are local.  They have local accountants, local attorneys, and their families are local.  Buyers are not willing to uproot their families and move them half way across the country to buy a small to medium sized business.  There are plenty of other businesses closer to home that they can buy and accomplish their goals.  Keep in mind, it is not YOUR business that a buyer is in love with, it’s cash flow.  Cash flow is what will allow them to be their own boss, send their kids to college, make their mortgage payments and live the lifestyle they want to live.

If the buyer for your business is local, the business broker tasked with finding them needs to be local.  He/She needs to sit down with them, meet them, tour the business with them, etc.  The broker has to know the buyer’s accountant, attorney, and financial planner so that they can be introduced and a sale can be facilitated.  A “non-local” broker won’t have these community ties and won’t invest the time and effort in obtaining them (since they won’t benefit from them on their “next deal”).  Make sure the broker you hire is local and tied into the local professionals or else you’re just listing your business for sale, not selling it.

3)  Beware of Business Brokers playing the “Numbers” game –   One of the popular models that I have seen in the business brokerage community is, “list as many businesses for sale as possible and when one sells, the broker makes money.”  There are several problems with this model.  Two of the biggest are:

• Your business is less likely to sell in a “numbers game” model because the broker is more concerned with getting listings (adding to their numbers) than selling your business.  Think about it, it’s a numbers game.  More listings = more opportunities for something to fall into place and earn a fee.  To this broker quality is not important.  Quantity is their focus.  Let me be clear, a mispriced business listing will not sell.  The asking price must be properly supported by the assets and cash flow available for sale in order for the business to be sold.  Consider how much time your broker spent making sure your asking price was fully supportable and what type of analysis they compiled to substantiate that position BEFORE they tried listing your business?  Where were their priorities?  Listing the business or making sure the business was saleable and priced properly?  Listing vs. Selling.

• Let’s look at the “numbers game” broker from another angle.  This broker is not charging up front fees.  So, they must care about selling your business right?  I mean, if they don’t they won’t make any money, right?  Business brokers playing the numbers game do care about selling businesses; they just don’t care which one.  As long as they earn a fee somewhere, they don’t care which business generated that fee.  The best way to sniff out these brokers is to understand how many listings they have at any one point in time and how many of those actually sell.  The percentage of sold vs. listed is the key metric to understanding if you’re dealing with a “numbers game” player.

4)  Beware of the Other Fish in Your Pond – Business brokerage firms come in all different shapes and sizes.  Understanding how your business fits into the broker’s inventory BEFORE listing your business is critical to the broker hiring process.

• Being a small fish in a big pond is rarely good.  Most business brokers earn fees based on a percentage of the sale price.  If you’re the smallest business in a broker’s inventory, what is the likelihood that you will command the lion’s share of their time, attention and effort?  Which fees will they spend their time and energy chasing?  In all likelihood, the larger ones.  Make sure that you’re a meaningful part of the broker’s inventory.  If the sale of your company would generate $100,000 for the broker, make sure that his/her inventory is comprised of other businesses that would generate him/her $100,000 in fees.

• Being a big fish in a small pond can go either way.  The broker will be highly motivated to complete the sale of a big fish if their inventory is all relatively small fish.  It’s the opposite of the scenario above.  Now, you command the lion’s share of their time and attention.  But, will that effort result in a positive outcome?  Will the broker have access to the resources necessary to complete a successful sale?  The best way to protect yourself in this scenario is again to select a firm with a proven track record of success selling companies with deal sizes similar to yours.

If you have questions about a particular firm or broker, don’t hesitate to call or e-mail.  I’ve been in this business a long time and know a lot of the players.  I’ll either tell you what I know, or point you in a direction for more information.  Just let me know how I can help.  Scott Mashuda, Managing Director, River’s Edge Alliance Group, LLC.  Phone: (412) 894-3244 or (440) 915-3082.  E-mail: smashuda@RiversEdgeAlliance.com.

1. “I can buy a business with no money down” – It’s not 2007 anymore and the days of financing 100% of the purchase price are over.  In today’s economy, you will be required to inject equity into the transaction equal to 20% – 25% of the purchase price.  If you are not capable of making this investment in the business you plan to purchase, it’s time to start looking at a smaller (or cheaper) business.

2.  “All the seller cares about is money” – While it’s true that money talks and all else walks, it is rarely the only factor in a seller’s mind when it comes to selling their business.  Business sellers have often spent their lifetime growing their business and they’re not about to simply turn it over to the highest bidder.  Their employees have become family and their business has become their identity.  If you wish to purchase the seller’s identity, you need to convince them that you’ll continue the legacy they’ve built long after they’re gone.

3.  “There is something wrong with this business or else it wouldn’t be for sale” – This could be the biggest misconception of them all.  Very rarely does a business owner go into business with the intention of selling it.  But, as time goes on, an owner will begin to realize that they can’t take the business with them once they’re gone.  They need to sell the business if they want to enjoy retirement.  Most business owners are not selling the business because there’s something wrong with it.  Most just want to spend some time with family and friends before it’s too late.

4.  “I have experience with a large corporation.  So, I am well groomed to own and operate my own business” – Don’t kid yourself.  Have you ever heard the saying, “you don’t know what you don’t know?”  This has never been more true than when it comes to transitioning from a corporate job to small business.  In the corporate world you’ve been surrounded by lots of systems and support staff allowing you to concentrate on a particular area of the business.  As a small business owner you will be everything from the chief executive officer to the chef window washer.  If you’re unable to swallow your pride and embrace a “whatever it takes” attitude, small business ownership may not be for you.

5.  “The seller will finance the majority of the purchase price” – the seller may be willing to finance a small portion of the purchase price (10% – 20%) but rarely will their generosity exceed this threshold.  If you need the seller to take the majority of the financial risk in order for you to complete a transaction, maybe you’re not the best buyer for their business.  Think about it this way, what if you retired from your current job and your replacement was a new college graduate with no work experience.  The replacement had no mentor, no coach and no boss.  Would you decide to take a portion of their salary each year for retirement instead of a guaranteed retirement package?  Remember, if they fail you get nothing.  If you won’t do it, why should the seller?

On June 10, 2011 River’s Edge Alliance Group, LLC completed the sale of Mincin Insulation Service, Inc. to Tedesco Partners, LP.

Mincin Insulation Service, Inc. is an insulation service provider located in Pittsburgh, Pennsylvania.

Founded in 1975, Mincin Insulation Service, Inc. is as a sub-contractor for Western Pennsylvania utility companies as part of their low-income weatherization program.  In addition, Mincin Insulation provides insulation services to private residential customers in and around the Pittsburgh area.

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River’s Edge Alliance Group, LLC is a business brokerage firm with offices in Pittsburgh, PA and Cleveland, OH.  River’s Edge Alliance Group served as the exclusive sell-side advisor on this transaction.

River’s Edge Alliance Group is pleased to announce that Co-Founder and Director, Todd Torquato, has been invited to attend the Small Business Administration Regulatory Fairness Forum on May 10^th, 2011 in Pittsburgh, Pennsylvania.

Todd has been asked to share his thoughts and expertise with National Ombudsman and Assistant Administrator for Regulatory Enforcement Fairness Esther H. Vassar regarding how to create a more fair and cooperative regulatory relationship between government agencies and small businesses.

To help us make your voice heard, please contact Todd with your input on how government policy can be adapted to create more fair regulations in the small business community.

Todd Torquato

Office:    (412) 631-8701

Direct:    (610) 613-8784

Email:     tatorquato@RiversEdgeAlliance.com

Internet: www.RiversEdgeAlliance.com

For more information on the Office of the National Ombudsman, please visit the Office of the National Ombudsman.

On April 28, 2011, River’s Edge Alliance Group Co-Founder and Managing Director, Scott Mashuda participated in the White House sponsored event, “Startup America:  Reducing Barriers Roundtable” in Pittsburgh, PA.

“Startup America” is a White House initiative to celebrate, inspire, and accelerate high-growth entrepreneurship throughout the nation.  The coordinated public/private effort brought together an alliance of the country’s most innovative entrepreneurs, corporations, universities, foundations, and other local leaders to work with a wide range of federal agencies to dramatically increase the prevalence and success of America’s entrepreneurs.

Mr. Mashuda introduced the following 3 small business barriers to the discussion:

• Access to Capital
• Taxes
• Reduction in Paperwork

As part of the collaborative problem solving effort, participants were encouraged to bring solutions for reducing these barriers, not just the barriers themselves.

Mr. Mashuda shared the following potential solutions:

• Make principal repayments on small business debt tax deductible.  Many entrepreneurs and small business owners are forced to leverage their companies to make it through start-up or recessionary times.  These owners, specifically LLC’s are taxed on the company’s earnings with no consideration to the fact that these earnings may not have been distributed to ownership, but rather used to pay down debt.  Taxing pre-debt earnings puts the entrepreneur / owner in the difficult position of needing to pay taxes on money they did not actually receive.  Taxing entrepreneurs strictly on their distributions rather than the company’s earnings would eliminate this hindrance to growth.

• Make credit card interest for small business owners and entrepreneurs tax deductible.  Since a track record is required to obtain third party financing, many entrepreneurs are forced to bootstrap their startups with credit cards.  Making this interest tax deducible, the same as third party loan interest would ease the tax burden on entrepreneurs during start-up.

• Make interest income for investors in small businesses tax deductible.  This would encourage individuals to lend money to small businesses that do not have access to bank debt.  The idea would be to incentivize family, friends and other non-qualified angels to invest in entrepreneurial enterprises.

• Make dividends to minority owners in small businesses tax exempt (or taxed at a lesser rate) in an effort to encourage high net worth (non-qualified angels) to invest in startups.

• There needs to be recognition and incentive for SBA lenders to lend based on cash flow.  Cash flow repays loans not collateral.  The current focus by the SBA on collateral in order to contribute their guarantee inhibits lending to service based and technology businesses with minimal fixed assets.

• Increase the rate at which capital flows by enacting a reduction in paperwork act similar to the Reagan Paperwork Reduction Act.

Mr. Mashuda would like to thank the Administration for providing the forum by which entrepreneurs can introduce barriers to growth and share potential solutions.  We are hopeful that our voices will be heard in Washington and changes are implemented.

To discuss these ideas in further detail, please contact Scott Mashuda at (412) 894-3244 or by e-mail at smashuda@RiversEdgeAlliance.com.