By Cliff Ennico
“I run a small manufacturing business. We have only one product, but it’s a doozy. Even during the pandemic, our annual sales have been in the mid-six figures. Since I’m the only one working in the business, our profit margins are 80 percent or better.
“We had a patent and trademark for this product years ago, but I let them both expire. There’s been a couple of Chinese knockoffs entering the market, but I’ve done my marketing well: Our product is everywhere online, and just about every online review says we are way better than the knockoffs. In any event, they haven’t impacted our sales.
“The thing is, I’m getting old — will turn 80 next year — and I want to enjoy what’s left of my life. I’ve had a couple of offers from companies that make similar products, but I really don’t know how to price this business or how to figure out if I can get a better offer elsewhere.
“I’ve been thinking about hiring a business broker, but those guys are just so darn expensive. I don’t know if I want to spend 10 percent to 15 percent on someone who’s just going to sign up a deal with someone I’m already in touch with. Yet I’m afraid of taking this on myself for fear that I will sell myself — and my life’s work — short. Any ideas?”
My opinion of business brokers has mellowed somewhat over the years. When I was first starting out, business brokers were the last place you went to sell your business. The perception was that if a business was listed with a broker, it was a “dog with lots of fleas” that the owners were desperate to unload because they knew something (usually bad) that the marketplace in general didn’t.
That has changed over time, mainly because business brokers have changed the way they do business.
A good business broker does much more than just find a buyer and negotiate the purchase price. The right broker will:
• Tear apart the business and figure out its strengths (those factors that will drive a sale price up) and weaknesses (those factors that will drive a sale price down).
• Access both print and online databases and put together a list of comparable businesses that have sold within your geographic area in the last three to five years.
• Determine the right “multiple” of your business’s gross sales or pretax earnings (“EBIT,” or “earnings before income taxes”) that will dictate your initial offer.
• Look beyond the local marketplace to find both strategic (companies that already make similar products) and opportunistic (companies that are not in your market but are looking for a way in) buyers.
• Negotiate the purchase price and help you put together a nonbinding “letter of intent” with the key business terms already agreed to.
• Help you find good local accountants and lawyers to help you close the deal.
• If necessary, help your prospective buyer find the financing they need to do the deal.
For all that work, a commission of 10 percent to 15 percent of the purchase price isn’t a bad deal.
A business like yours is a tough one to price and sell, for a number of reasons:
• You have only one product.
• Your intellectual property is no longer protected, and there are cheaper competitors in the market already (although not very good ones, from the sound of it).
• Any buyer with a manufacturing plant, equipment and employees is going to have higher operating costs than you have working out of your garage, so their profit margins are guaranteed to be much lower than yours.
• I’m sorry to say this, but your advanced age will make it difficult for you to accept a deferred purchase price or a long consulting arrangement as part of the deal. Simply put, at age 80, a five- to 10-year promissory note is a very speculative investment indeed.
On the plus side, it appears you have done a great job of building a recognizable brand — despite not having a registered trademark — and solid market awareness. Your best buyer is going to be a company that can take the ball and run with it, building upon your success and growing the business.
I would retain a good business brokerage firm and give them the contact information for the two companies that have expressed an interest in your product. You will sleep a lot better at night knowing that you are not responsible for getting the best possible deal you can.
When speaking to brokers, signal your willingness to accept an “all-cash” deal with a percentage of the buyer’s gross sales from your product for the next one to three years and (maybe) a one-year consulting agreement with the buyer so you can help manage the transition process.
To find good local business brokers, talk to some local attorneys and accountants who handle business sales (your local bar association or CPA society can point you in the right direction).
There are also some nationwide networks of business brokers, most prominently Transworld Business Advisors, BBN and Nationwide. If they are members of the National Association of Business Brokers, that’s a plus.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
COPYRIGHT 2021 CLIFFORD R. ENNICO
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