Business Seller Thinking Like a Business Buyer
I recently had a refreshing meeting with a Seller who has successfully operated his business for 25 years and wants to begin to transition out and retire. The business produces decent discretionary earnings that average about $250,000 annually. The business is fun to operate and it provides the owner with a excellent life style.
As we were discussing the value of the business and an appropriate pricing strategy, I let the owner know the I felt he should offer at the minimum 50% of the purchase price in Seller’s financing. His reply, “Hey, I can do better than that. I bought this business, putting down my life savings and then paying off the Seller’s note for about 80% of the purchase price. That Seller put me in business and helped me attain this great lifestyle. I would like to do the same for my Buyer.”
WOW! Someone that gets it!
So we listed the business based on a multiple or 3 times average SDE with the Seller holding a note for 75% of the purchase price. To make sure the Buyer had an opportunity to work into the business, we amortized the note over 20 years with a 5 year balloon. This monthly payment allowed the Buyer to retain a decent annual salary out of SDE while he or she learned the business. We figured in 5 years, the Buyer would have established sufficient credibility in the business to be able to refinance the Seller’s note with a conventional business loan.
Because of the way this deal is structured, this business opportunity is going to generate alot of Buyer activity. Plus the Seller is willing to stay on in a diminshed capacity for up to a year to ensure that the transition goes smoothly. That’s smart. Obviously, the deal’s ultimate success depends on the Buyer’s ability to take over and operate the business in a profitable manner. This scenario is likely to transpire with the Seller acting as a true mentor.
With economic conditions as they are, with uncertainty dominating the Buyer-Seller discussion, it is even more important to structure each deal as more of a partnership that leads to a successful transition. Buyers are likely to take on the risk of paying higher multiples when Seller’s show they have faith in the future of the business and are willing to stay in the game a little while to ensure its continued success.
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Brad Elliott is Principal/Broker at VR Business Brokers in Ewing, NJ. Brad himself has owned, operated, and sold a multitude of small to mid-sized businesses over the last 15 years. Brad received his MBA from MIT’s Sloan School of Management and comes from a family of entrepreneurs.
