Look Ahead Part II: Complexity of the Selling Process

Although every real estate transaction is unique, there is without question the greatest variety of issues in business brokerage. For that reason, it is often considered the most complex channel to navigate; for that reason it is also most difficult to find qualified and experienced advisors who can pilot you through the narrows and shoals.

If you have the assistance of a qualified and experienced business broker, it may be wise to carefully evaluate the advice before making decisions. From my own experience the selling process normally takes between three and eighteen months from start to finish depending of course on the business size and type. During that time it is typical for dozens of inquiries to be made and only a few proceed to the offer stage after prequalification; this is followed by a month or two of intense negotiations after which it may become apparent that the investors are not satisfied with the internal workings of the business or acceptable terms can not be reached. For this reason, I am in the constant process of entertaining several purchasers at once, market permitting, to save my vendor time and money. This creates an emotional atmosphere of highs and lows that can be a great stress if you have not been properly prepared to accept it.

Very often owners are reluctant to enter into longer marketing agreements. In other professions where payment is by the hour, this may seem like a prudent measure, but because brokers are paid only when they are able to arrange and complete a transaction, it is entirely within their interest to get things done as quickly as possible. To protect the business and our vendor, careful attention to the background of the purchaser and the dissemination of business information is of utmost importance. Many owners cite the advantages of being able to get out of a contract sooner if they are unhappy with the service – the trade-off is that the broker may try to rush the process. A well orchestrated marketing plan costs a broker a significant expense and usually turns up the best leads several weeks into the process. Brokers will be reluctant to make this type of effort unless they are assured of being able to recoup on their investment of time and money. Development of professional marketing materials, advertising strategies, internet marketing and old-fashioned client calls are all active processes that are taxing on funds and staff hours.

In general, when an amenable purchaser is found, the successful completion of the deal rests on an equitable apportionment of risk. Irrespective of their financial position, purchasers will not use an all capital strategy. First, goodwill, as an asset, represents a present value consideration for future cash flow: the buyer wishes to see the goodwill of the company continue to grow. It is in the buyer’s interest to hedge their risk by having the seller, in the form of a vendor-take back, finance the goodwill or at least a portion of it. This keeps the seller integrally involved in the transition of the business, and to some extent, interested in its success for a portion of time over and above the transition period. This also has the advantage of giving the purchaser a holdback in case the vendor’s promises or representations do not hold up. The vendor may also want some kind of guarantee that the debt will be honoured: a mortgage or even an escrow agreement (the shares are held in trust by a third party until the purchase price has been paid in full).

Please feel free to contact me should you have any questions about commercial investment or business brokerage. It is my pleasure to discuss with you anything about my profession.

A couple things that make people consider incorporating sooner rather than later are.

1. If the business is only part of their overall income then they might need the tax relief at a lower net income per owner. This is because when determining tax rate you look at the total income not just the income from that source. For example a person with only one source of income (his/her business) might pay $2,500 on $10,000 of profit, whereas a person with several sources of income might pay $4,000 on $10,000 of profit from the business.

2. If the business uses a lot of equipment (for example a Trucking business needs trucks to operate) it will be less expensive to buy a truck with after tax profits from an incorporated business experiencing a 17.5% tax rate than from an unincorporated business experiencing a 37% tax rate.