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Selling a business often about the right fit

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The No. 1 reason business owners decide to sell is that they are ready to retire, said Thomas Kerchner, managing director of BMI Mergers & Acquisitions, which has offices in Allentown, Reading and Philadelphia.

Maybe they are old enough. Maybe they are successful enough. Maybe they are burned out. Maybe they are ready for a new project.

After surviving the Great Recession, owners may see the improving economy and existing low interest rates as marking a good time to sell.

In any case, selling a business is not like selling a house.

With a house, you can see what you’re getting on a walk-through. Much of a business’ major assets – customer base, goodwill, brand, institutional experience and knowledge – are intangible.

Home sellers want everyone to know their house is for sale. Business owners usually don’t want their customers and competitors to know their plans, at least at first.

And when you sell a house, you’re out of there. Business owners often create complex agreements with their buyers about remaining as consultants or employees – or retaining a financial interest.

“Part of what we do is finding the right fit,” Kerchner said. “It’s not all about money.”

Kerchner recently helped sell a database-management company in Bethlehem with about 20 employees. He received many offers and sold it to a man from Virginia who relocated his family to Pennsylvania.

“It was exactly what he was looking for,” Kerchner said.

Throughout the process, the priority is to protect the business’ interests, not reach a deal, Kerchner said.

In April 2011, Kerchner helped the owner of Precision Graphics Inc., a specialty printing company in Cumru Township, Berks County. The buyer, Design Label Manufacturing Inc., of East Lyme, Conn., wanted Precision Graphics’ capabilities. The owner worked for the buyer for a year after the deal was struck.

The first step is to identify possible buyers, and the more the better.

Kerchner has three nets to cast. First, he examines his database of buyers.

Second, he runs advertisements just vague enough to cloak the seller’s identity:

For example, here is text from an ad on his website:

Fabricator and manufacturer of specialized metal products.

Location: Pennsylvania.

Revenue: $1.7 million.

This business consists of the fabrication and manufacturing of specialized metal products ranging from intricate stainless steel machine components to large, oversized steel weldments, platforms and custom tanks. Company has impressive list of customers in the papermaking, chemical, food and other industries. The company combines engineering and manufacturing expertise and a highly skilled workforce to provide a full range of fabrication capabilities. Owner is retiring.

Finally, Kerchner also personally contacts people he believes would be interested – perhaps competitors, companies in similar industries or private-equity groups.

Then he creates a confidential business review, or marketing book, to send to interested buyers, after they sign confidentiality agreements. The book describes the business’ finances, history, management structure, market, products and services. For one sale, Kerchner sent a book to 80 potential buyers.

He gives the business owners a range of what he thinks their businesses are worth, which sometimes surprises them. Some realize they can’t retire yet.

Buyers looking for businesses that have sales of less than $1 million a year generally want an asking price up front.

Kerchner recommends for larger enterprises that the market should set the price.

Some buyers may be able to offer more than others if the acquisition helps them substantially reduce costs. Others are motivated to pay more for other reasons. For example, a health care company in Canada that wanted a foothold in America offered the highest price for a business that Kerchner sold.

The entire sales process often takes more than a year, and takes longer now than ever, Kerchner said. For one thing, loan closings take longer because of more careful due diligence after the recession, he said.

Most common are outright sales, but often owners agree to stay with the company for a year or three as a consultant or employee. In large deals, say with companies that have sales of $10 million or more a year, the seller might retain some ownership.

Almost always, banks, and the Small Business Administration – if it is guaranteeing the loan – require the seller to retain a stake in the company, typically 15 percent. So on a $1 million deal, the seller might hold a $150,000 note, and the buyer might make a $200,000 down payment and borrow $650,000.

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