Triaz International System™
A Proven Process -
The Most Effective Way to Sell a Business
Stages for a Successful Sale:
It is important that each of these steps be completed before moving on to the next. This process successfuly moves deals forward and completes business transfers. The sequence builds a foundation to reduce delays that derail a deal, and ensures the process is organized and managed. This process successfully moves deals forward and closes sales. Click the links below to learn more about each stage.
Triaz International provides the expertise to accomplish these tasks in an expedient and cost-effective way.
The actual content of each step differs widely for each sales process based upon the selling problem. For instance, if the Preliminary Assessment shows that there is a low probability of goodwill value, then the appropriate appraisal will be a fixed asset appraisal rather than a business appraisal. Business appraisals are for the purpose of determining goodwill value and the overall fair-market-value of the business as a going concern.
TRIAZ INTERNATIONAL BUSINESS TRANSFER SYSTEM
STEPS IN DETAIL
Step 1. Preliminary Assessment.
This is the most important step. This step is NOT a valuation, but an assessment of the relevant financial and operational facts.
Its primary purpose is to determine if a sale is feasible or even desirable. Many businesses are simply not marketable “as is”. The Triaz Preliminary Assessment can identify for the seller their best options for a timely and effective sale.
Some businesses have no intangible asset value (goodwill). Goodwill is normally associated with profitability beyond that representing a fair return on tangible asset investment. Determining intangible asset value is the principal reason for a business appraisal. The Preliminary Assessment will determine that a high probability of goodwill value exists before incurring the expense of an appraisal.
The Preliminary Assessment will be completed by a Triaz analyst who will gather all important facts about the business, and prepare adjusted financial statements to fairly reflect the “Net Operating Cash Flow” (usually for the three most recent years) The Preliminary Assessment assesses both strengths and weaknesses, allowing the seller an opportunity to remedy weaknesses where possible, before an appraisal (the next step of the Triaz International Business Transfer System) is done. This adjusts for non recurring expenses, unusual shareholder compensation, discretionary expenses and personal perks. Return to Top
Why do I need a Preliminary Assessment?
- It is absolutely the most important step when considering the sale of a business because it identifies where the value is in your business and what you have to sell.
- It is a tool to analyze the feasibility and probability of a sale, before further time, money, and energy is expended.
- It gathers and organizes the important facts about a business to give the appraiser the information he needs to value the business and if an appraisal appears to be warranted. In a profitable small business, the principal asset of the business is usually its goodwill value. Determining the facts that create the goodwill value is essential. It is the foundation upon which the appraiser will determine a defensible value of the business in the next step.
- It develops information that will be used in the Confidential Offering Memorandum. The Confidential Offering Memorandum (the step following the appraisal) is the tool used to make the business tangible to a buyer. Remember, that though you may think the business “speaks for itself” it does not. The value proposition to the buyer will have to be clearly supported by the information provided to them.
- It determines marketability. Not all businesses are marketable. In fact only about a third of small businesses are marketable as a going concern business. The Preliminary Assessment will determine if your business is marketable before additional time and money are spent on the Appraisal Report. If it is not marketable, you will know the reasons why, and may be able to take remedial action.
- It allows Triaz to prepare a detailed estimate of costs for completing the following steps. Understanding the costs up-front is of utmost importance to a selling business owner.
Once the Preliminary Assessment indicates the business is marketable, the next step is to determine the price. The appraisal report determines the fair market value of either the assets for an “asset sale” or the equity for a stock sale. More than 95% of small business sales are “asset sales.” This can be confusing because an asset sale includes the value of the intangible asset known as “goodwill,” as well as fixed assets.
Goodwill in this context is not a qualitative statement, it is a quantitative value based upon price/earnings data from sales of comparative businesses.
The appraisal report for “asset value” will determine the value of the total of Fixed plus Intangible Assets. It does not try to find the allocation to each, only the total. To this value other items are added for an asset sale, as appropriate. These include merchandise inventory, receivables, real property (if owned by the business) and discrete intangible assets such as patents, copyrights or proprietary processes for which the company receives royalties.
Independent Appraisers
For complete objectivity, Triaz International relies upon independent third party appraisals from qualified business appraisers, and requires all appraisals to meet USPAP STANDARDS. (See Appraisal Standards (USPAP)).
The appraisal is developed from comparisons with sales of similar businesses, or business with similar operating profiles. In these comparisons the central tendency of the Sales Price to Net Operating Cash Flow (NOCF) ratio is analyzed.
Once this is done, the positive and negative aspects of the business are assessed, with respect to the “average” of the comparable sales found. This creates a potential premium or discount in value in the Price/NOCF ratio.
The methodology used in these analyses is “heuristics” which is an analysis tool used when data is limited or “fuzzy” (meaning multi-variable) as in the case of business sales comps, where the date may vary, and motivation of parties and terms of the actual deal, are not completely known, etc. The heuristics approach has been demonstrated to provide more reliable results in these types of analyses than conventional “statistical methods” which have been developed to deal with a single variable.
Once a value is found both by comparative sales, and by investment analysis, a feasibility test is conducted, wherein certain financial structuring assumptions are made, and the effect on return on investment assessed.
Appraisal Standards (USPAP)
The Uniform Standards for Professional Appraisal Practice (“USPAP”) were developed by the Appraisal Standards Board of The Appraisal Foundation in response to the Financial Institution Reform, Recovery, and Enforcement Act (FIRREA). Its standards have become mandatory for all federally related real property appraisals. Its standards for Business Appraisals and Machinery/Equipment Appraisals are recommended, and it has been adopted by most states and federal agencies as a mandatory standard for all appraisals. Because of this, it has become recognized as the “generally accepted standards of appraisal practice” and has been adopted by most appraisal societies and professional organizations as a mandatory requirement.
A summary of the provisions of USPAP is provided below. Applicable provisions are shown on bold, and details are shown in the table following. For additional information search http://www.appraisalfoundation.org, or call 1-202-347-7722.
How accurate are appraisals?
Appraisals are investigations into probabilities, not exact numbers. The appraisals used by Triaz International generally indicate a most probable value, and a range of -10% to +15%. This creates a “probable range” of 25%. The closer to the most probable value, the higher the probability of a successful sale for both buyer and seller.
Why not just use rules-of-thumb?
The appraisal report does far more than simply state a value. It defends the value. Rules-of-thumb tend to “overvalue” a bad business, and “undervalue” a good one because they don’t investigate the relative merits of the business. That is why they are not used by lenders in evaluating financing proposals. Additionally, rules-of-thumb cannot reflect the qualitative aspects of your business. Return to Top
Step 3. Confidential Offering Memorandum.
A prospective buyer needs proper financial and operational information to determine if the acquisition is of interest. This information is conveyed in a Confidential Offering Memorandum (COM), which Triaz International will create to market your business. This is the key selling tool for the business and serves to package all the relevant information that a buyer needs to make an informed decision. If properly prepared, it will save the seller considerable time and effort, present the business in a factual and positive way, and minimize the risk of claims of misrepresentation by minimizing oral discussion of the business. The seller will be comfortable with information being distributed to prospective buyers because the seller is able to control the information presented and the distribution through the COM.
Why do I need a Confidential Offering Memorandum?
- The COM allows you and the broker to clearly and succinctly articulate the meaningful financial and narrative facts about the business.
- You will approve the final draft, and from then on will know with surety what is being represented about your business. When presenting it to multiple potential buyers, you will not have to try to remember what you said at the time. The COM speaks for you. It minimizes the potential for claims of misrepresentation by the buyer.
- It is a way of presenting the most important selling points so that a potential buyer can “internalize” them.
- It allows a potential buyer to quickly and efficiently determine if there is an interest in proceeding further with an acquisition. This will save you much time and aggravation.
- Minimizes time spent answering the same questions repeatedly.
Without a marketing plan, approved by the seller, there is no systematic way to proceed to sell the business. The marketing plan will identify prospects for a strategic sale, if any can be found, and also determine who will not be contacted. For instance it may not be desirable to offer it to competitors in the area, or nearby competitors may be the primary prospects. Marketing plans differ greatly depending on the type of business, the preferences of the seller, and the type of sale desired. The experience of the broker is invaluable in developing this plan.
Why do I need a Marketing Plan?
- In many cases the seller will NOT want to advertise publicly, and will direct the broker to proceed “behind the scenes” to develop qualified prospects from within the broker’s buyer pool. This maximizes confidentiality and the risks associated with employees, vendors, and customers becoming aware of a sale event. Confidential, discreet discussion is the most common approach for selling larger businesses in the M & An arena.
- The broker needs to know your sensitivities, and your fears. It may be foolish to offer the business to a competitor who will milk you for information and then use it against you.
Upon completion of the marketing plan, the brokerage or selling program needs to be defined. Just how the sales effort will be conducted to the target audience identified in step 4 is the most important program to develop. This is the very important phase where a buyer and seller must reach a meeting of the minds and a purchase offer is made by the buyer.
There are two possible modes for this stage:
- For Sale by Owner
Go it alone and attempt to conclude a sale without professional assistance. Though this is possible, it is not very feasible for the following reasons:
- It takes considerable time to discuss the business with interested parties, and to determine who is really a prospect rather than a “tire kicker.” Most business owners are too busy with their own operation to effectively take on this additional task.
- It is virtually impossible for a seller to remain unemotional and objective in the eyes of a potential buyer. Most encounters end up with the buyer walking away from the opportunity altogether. Often they leave without explanation and the seller misses out on the opportunity for direct feedback. This feedback may be critical to the refinement of steps 1-4.
- Engage a business broker
A business broker overcomes the “go-it-alone” downfalls by taking significant burden off the shoulders of the owner/seller and maintaining objectivity towards meeting the objective of a successful sale.
- A broker must be skilled at matchmaking and “keeping the deal together” or facilitating the process during the arduous period that follows the initial presentation. Once the facts have been presented to a possible buyer, rationality leaves the scene, and everything from that point forward is highly emotional and subjective.
- As a benefit to the seller who wants a successful sale, brokers are able to assist the buyer in making a proposal, helping arrange financing, and dealing privately with the buyer’s fears and trepidations.
There are two possibilities for engaging a broker, one of which will not be acceptable to most responsible brokers. The differences are in the nature of the agreement.
- The most common, and acceptable agreement, is the “Exclusive Authorization to Sell” type of brokerage agreement. Under this agreement the broker representing the sale has the authority to conduct and supervise all sales efforts, and will receive a commission if the business is sold. This type of agreement not only requires the best efforts of the brokers, it eliminates the haggling and legal liability that occurs when multiple brokers are representing the business. The “open listing” works all right in real estate – it doesn’t work at all with businesses. This does not mean that a broker will not engage with other brokers to sell the business …it just means that if this is done, it will be by clearly stated agreements, and any commission sharing arrangements will be clear and in writing.
- An alternative is the open listing where the seller can engage multiple brokers, and whoever sells if first gets the commission. The problems with this are obvious: There is no control over who sends what information and where. All efforts at confidentiality are compromised, and in the end, there is no way to effectively deal with multiple offers. Triaz International does not enter into non-exclusive brokerage agreements.
The remaining steps required by the Triaz International Business Transfer System are in the brokerage phase. They are:
- Negotiation of Letter of Intent This sets forth the main deal points and facilitates the drafting of a Purchase and Sale Agreement. It is non-binding.
- Preparation of Purchase and Sale Agreement. This is the Legal Agreement which effectuates the sale. It is normally drafted by the broker, and then finalized by the seller’s attorney.
- Arranging and facilitating financing
- Due Diligence. This is the investigative process by which the buyer becomes satisfied that the books, records, and other information about the business, are as suggested in the Confidential Offering Memorandum, and meet the buyer’s satisfaction. The broker assists in this phase by making sure the information the buyer wants to see is available and in coordinating the actual investigation. The buyer (and the buyer’s advisors) must actually complete the investigation.
- Escrow. Every state has its own laws regarding escrow. But essentially an escrow agent holds the funds, and holds the signed purchase and sale, and other agreements and documents needed to complete a sale, until all is complete. Escrow is then “closed” and buyer takes possession of the business and seller takes possession of the payment. The broker does not serve as an escrow agent but assists either a licensed escrow agent or an attorney acting as an escrow agent in completing all the steps required to affect a transfer, and receiving clearances for various state and local agencies.