FAQ

Based on industry statistics compiled over the past few decades, only 20% of all listed businesses sell on average. This may be surprising to learn, but the truth is that just because a business is listed does not automatically make it a good business. Another reason is that some HVAC businesses are entirely dependent on the owner’s skills and knowledge, which narrows the possibilities of finding the right buyer. Any owner considering selling their HVAC business in the next several years should consult a broker to help uncover areas that need improvement to help make the business more attractive to potential buyers in the future. Identifying these problems a year or more before bringing the business to market can make a significant difference.

There are many reasons why a business might not sell, but these are the main factors: a poorly run business, declining revenues, lack of a skilled management team, strong dependence on the owner for everyday operations, poor reputation, poor financial documentation, a lease that cannot be assigned, and a lack of recurring revenues are the most common reasons.

Unfortunately, most businesses are not ready to be sold. There is an extensive list of areas to focus on, but an objective evaluation by a qualified broker can help identify which areas can be worked on to improve the odds of a successful sale. The most significant obstacle to overcome is if the HVAC business has experienced declining revenues over the past three years, as few buyers wish to purchase a company that appears to be a sinking ship.

The optimal time to sell your HVAC business is when it is growing, performing well, and has experienced at least three years of increasing revenues. A favorable economic environment is a key factor as well, but it can be overcome if there are other signs the business is doing well. A good business that can be sold in almost any economy is one with strong financial performance, a competent management team, and a general manager who will remain with the business after the sale. The owner also needs to be committed not just to selling the business, but also to the sales process. There are a multitude of other factors to consider, but these are the most important. An HVAC business with these elements in place attracts significant buyer interest, which results in a successful outcome.

Our process generally follows these steps:

1. First, we determine the value of the business within the current market, which is usually expressed as a range. This is called the Broker Opinion of Value.
2. Next is signing the listing or engagement agreement. 
3. A Seller Interview is conducted, which creates the bedrock of the Confidential Information Memorandum (CIM) or Executive Summary. These are the same terms for the document that contains relevant information about the business that is provided to qualified prospective buyers.
4. The listing is created and the business is presented to the market.
5. Buyer inquiries receive responses, NDAs are obtained from the buyer, initial discussions with the buyer are arranged, and buyers are pre-qualified before sending the CIM.
6. Buyer questions are answered.
7. We initiate a phone meeting between the buyer and seller followed by continuous conversations to evaluate the interest level of both parties.
8. An in-person meeting with the buyer and seller is arranged, as well as a tour of the facility when the staff is absent.
9. A Letter of Intent (LOI) is prepared, outlining the terms and conditions of the agreement to purchase.
10. The LOI is negotiated.
11. A period of Due Diligence commences.
12. The definitive purchase agreement is created as well as other documents required by the parties.
13. The transaction is closed and funds are wired or deposited into the seller’s bank account.
14. Once the official sale, is complete, a period of training and transition begins as agreed upon in the purchase agreement.

The seller must be engaged and responsive to requests for information from the advisor. Financial updates must be sent in a timely manner. The business must remain in “show” condition, similar to when a home is prepared for sale. The seller must also understand that despite the stress of the process, they must remain focused on a successful outcome. With careful planning and guidance from an experienced advisor, this stress can be reduced. Ultimately, the most important responsibility is ensuring the business is still running for maximum financial steadiness and growth, as both the bank and buyer will demand financial reports on a monthly basis. Any roadblocks in the performance of the business can derail any translation, even up to the closing.

The growth of the business is the most important factor, as well as following the guidance of the broker with a sense of urgency. A good broker can walk a seller through all aspects of the process, but they must be willing to accept that advice.

The whole process can take up to a year or more, but the average time is between 5–9 months. Many factors impact the time period, but in an ideal situation, the seller can wait for the right buyer.

Some of the most important factors to ensure a successful sale are communication and urgently responding to requests from the broker. Any potential problems which are brought up during the sales process should be brought to the attention of the broker so that they are not caught off guard. Most issues are mathematical, which means that they can be mitigated by a financial solution through a creative deal structure.

Before any discussions are had about the business, the prospective buyer will sign a Non-Disclosure Agreement (NDA) where the buyer will agree to maintain total confidentiality about the business, including the fact that it is for sale. A good broker will reinforce the importance of the NDA to the potential buyer and the consequences of breaking it should it be violated. Most buyers understand this, but for those that do not, it is important to have a broker that can impart the importance of all information remaining confidential.

Once we have an NDA in place, the buyer has been pre-qualified, and one of more buyer-seller meetings have occurred a tour of the business will be scheduled. Most of these tours are after hours but on occasion the tour may be conducted during business operations and in these cases the buyer and broker are positioned as visitors, potential vendors, or service providers. Buyers are coached by the broker to maintain a low-key presence where questions and discussions are deferred to when the parties are in a location which provides absolute privacy.

The industry average is between 8% and 12% of the final selling price, but for transactions where the selling price is in excess of $1,000,000 most brokers will apply the Lehman or Double Lehman method which is a 1% (Lehman) or 2% (Double Lehman) reduction in the fee for each additional million dollar of final selling price. For a $4,500,000 sale price using the Double Lehman method the following would apply: 10% on the first million, 8% on the second million, 6% on the third million, and 4% on the fourth and subsequent million dollars of final selling price. Traditionally, when inventory is priced and sold above and beyond the price of the business (liquor stores for example where inventory levels change daily) a fee also applies, and the percentage is agreed upon between seller and broker. When real estate is involved, we discount the fee from the generally accepted fee percentage which would be charged by a commercial real estate broker.

We do not work with our clients on an “open listing” arrangement.  This is a matter of maintaining confidentiality. If you have more than one business brokerage firm working to sell a business, or you are trying to sell it yourself, the risk of a confidentiality breach is significant.

We only accept listings that we have confidence that we can sell.  When evaluating your business, we will be honest and upfront with you regarding its salability.  Many brokers will accept overpriced or unlikely to sell businesses to use these listings to attract buyers for their other businesses. They accept overpriced listings under the guise that the “market” will adjust the seller’s price. This approach usually results in an incredibly stressful and exceedingly long selling process and for many reasons, is usually unsuccessful for all parties.

When we engage with a seller, we make a very strong commitment to sell the business and believe that our experience will result in a successful transaction.

The question here is ‘how can I avoid paying a fee’. If there is a strong buyer known to the seller who is ready, willing, and able to complete a transaction we may offer a slight reduction in our fee but understand that locating a buyer is only one of a score of the hurdles that remain to get to the closing table and ultimately result in funds being wired into your bank account. There is no sale until you receive your funds.

Our listing agreement is for 12 months. On occasion we may reduce that period to 9 months. Not allowing the broker ample time to complete a transaction defeats the original purpose of the engagement.

We are intent on maintaining confidentiality throughout the marketing process and while an NDA should suffice, we take it a step further and let the seller decide when to disclose the identity of the business. In virtually all engagements we mask the exact location of the business and keep the description general enough as not to tip off a buyer. Buyers will sometimes object to not disclosing the name or more specific location as they have signed an NDA. Remember, as fiduciaries to our clients we work exclusively for them and early in the process will disclose only what will protect the confidentiality of the business. Savvy buyers understand and respect the process.

Depending on the size and type of business there are generally three types of buyers for a business.

• Financial Buyers: these are generally buyers who are seeking a business to operate as their primary source of income and are in effect, buying a job.
• Strategic Buyers: these are buyers who are looking to add your business to their own business. Their motivation may be the assets of your business which in addition to fixed assets would also include the customer relationships that you have built over time. This enables them to quickly scale without having to organically grow their business. These can also include buyers who have a portfolio of businesses where they may take advantage of consolidating back office functions to improve the profitability of the business being acquired.
• Synergistic Buyers: buyers in this category are seeking businesses which may compliment their existing business(es) as a logical extension to their product or service offerings.

Generally speaking, businesses in the Main Street or Lower Middle-Market are valued based on what is called Seller Discretionary Earnings (SDE) or Owner Benefit (OB) times the multiple for the size and type of business consistent with businesses in the same industry classification. The term ‘Adjusted Cash Flow’ is also synonymous with the above terms but is sometimes confusing as it also relates to other financial descriptions. The broker will conduct their initial financial analysis to determine the true benefit to the owner of the business. This process is called ‘recasting’ and uses the prior 3 years of federal tax returns as the basis for the analysis. Certain expenses which are benefits to the owner are added-back into the equation (and added to the net profit or loss shown on the tax returns) to arrive at a number which shows the true financial benefit to the owner. The customary add-backs include owner wages and the associated payroll taxes, depreciation, interest, amortization, non-recurring or one-time expenses, as well as discretionary items expensed by the business – charitable contributions for example. There are other certain personal expenses which may to added back but it is important to know that banks (including SBA lenders) which do not allow all personal benefits to be added back. While we are aggressive in using add-backs to determine the final SDE figure we also know that if the bank declines to accept those add-backs that the valuation of the business by the bank (yes, banks conduct their own valuation prior to finalizing a loan amount) may be discounted prior to closing. This leads to quite a bit of angst on the part of the seller and rightly so. Honesty and competence of the broker in setting real financial expectations for the seller is the only way that we know how to work with our clients. We tell them what they need to know rather than what they may want to know.

There are other attributes of the business which may increase or decrease the value of the business. These include having a competent team of staff which will remain in the business, intellectual property, social media scores, internal processes and documentation, and how the business ‘shows’ to a buyer, There are many more which may impact the value which your broker will determine as they take a deep dive into the business, its operations, and all of the attributes which contribute to the overall value.

The fair market value is, as the term sounds, the value that the open market places on the business as it compares to like businesses of the same size, location, and economic climate. Buyers will compare like businesses keeping in mind the ratio between list price, revenue, and SDE. Where the list price to SDE ratio is out of line buyers will usually simply determine that the business is overpriced and will not take a second look at the business to investigate further.

We do not and nor should you. There is a cliché in our industry which states ‘you can only steal it once’ and while we do not pass judgement on how businesses handle cash receipts, buyers and banks will not only completely discount cash from the equation but may question the integrity of the business owner casting a shadow over other aspects of the business. If you are not reporting cash now and are intent on selling your business for the highest price possible in the future, we strongly (emphatically) recommend that you begin recording all cash correctly.

Some but not all. Your broker will discuss each with you during the recasting process in advance of placing a value on the business.

Not normally except for businesses where inventories vary on a day-to-day basis (think retail liquor stores) and in these cases the business is offered at a price that does not include inventory and the inventory value (cost) is determined via a physical count 24 hours before closing. So, why is inventory usually not sold above and beyond the price of the business? Inventory is an asset that creates the cash flow which is a significant part of the price determination. The seller will transfer the amount of inventory that was historically required to produce the cash flow. For example, if the usual inventory amount were $100,000 then the final agreement would state that at the day of closing the inventory the business must have between $90,000 and $110,000 in inventory. If there is less than the agreed upon amount, then the price would be reduced and if more the price would be adjusted upward.

Normally, the seller delivers the business debt-free and keeps all cash, A/R, and cash equivalents. Most times the seller will leave some cash in the business. This is Working Capital which may remain as cash or A/R. As above, this is normal in Asset Sales. Stock Sales are another transaction structure and in these cases the buyer is acquiring all assets and all liabilities, so the seller does not pay off the debt at closing. Transaction structure is critical to the business sale and will have an impact on the cash delivered to the seller at closing as well as having a tax impact. It is important that the seller and broker discuss this in detail with the seller’s CPA or tax professional.

Many times yes, but see the above answer. Also remember that almost any item can be negotiated as a part of the sale transaction and the buyers need to have working capital may take the form of cash or A/R if a part of the agreement.

Per above, normally no.

In Main Street and Lower Middle-Market transactions Asset Sale is normally used to describe that the buyer is buying the all of the assets of the business (which is operating) but not the stock of the business, which would be a stock sale. In an asset sale the seller will keep all cash, A/R, and cash equivalents and pay off all debts and liabilities. In a Stock Sale the buyer is acquiring all assets including cash and liabilities. Now, there is also a variation in the term Asset Sale where the business may have closed or ceased operations and no cash flow is being generated. In these situations, the buyer is in effect simply buying the assets of the business (fixed and otherwise). This is commonplace in selling restaurants which have closed.

Only if it is a Stock Sale. Otherwise you will be retaining the EIN/TIN and the corporation. After the sale your corporation will remain in existence until all tax matters are settled and concluded. Your CPA will advise you on when the corporation will cease to exist. When Seller Financing is a part of the transaction structure the corporation will continue to exist, at the very least, until the seller note is fully paid.

Because of the variable nature of the market and buyers we normally express the value of the business (the most likely selling price) as a range when working with the seller. This leaves some room for negotiating but can be offset by other creative transaction structures which provide value back to the seller. However, we do not inflate our list price in anticipation of a protracted negotiating process. The most important part of the pricing equation is the broker being able to defend their price valuation – both to a buyer and their lender. Weak or less than ethical brokers will not only inflate the price but also the sellers expectation with the idea that instead of objectively and honestly communicating the truth to their seller that they can blame the market on revealing the true value of the business. Honest, experienced, and competent brokers will tell the seller what they need to hear rather than to reinforce the seller’s unrealistic value and final sales price expectation. In the worst cases it is the broker who unrealistically sets the expectation to secure the listing. In the best cases the broker will provide honest and objective price valuations even though the broker’s opinion of price may be poorly received by the seller.

Because of the variable nature of the market and buyers we normally express the value of the business (the most likely selling price) as a range when working with the seller. This leaves some room for negotiating but can be offset by other creative transaction structures which provide value back to the seller. However, we do not inflate our list price in anticipation of a protracted negotiating process. The most important part of the pricing equation is the broker being able to defend their price valuation – both to a buyer and their lender. Weak or less than ethical brokers will not only inflate the price but also the sellers expectation with the idea that instead of objectively and honestly communicating the truth to their seller that they can blame the market on revealing the true value of the business. Honest, experienced, and competent brokers will tell the seller what they need to hear rather than to reinforce the seller’s unrealistic value and final sales price expectation. In the worst cases it is the broker who unrealistically sets the expectation to secure the listing. In the best cases the broker will provide honest and objective price valuations even though the broker’s opinion of price may be poorly received by the seller.

Because of the variable nature of the market and buyers we normally express the value of the business (the most likely selling price) as a range when working with the seller. This leaves some room for negotiating but can be offset by other creative transaction structures which provide value back to the seller. However, we do not inflate our list price in anticipation of a protracted negotiating process. The most important part of the pricing equation is the broker being able to defend their price valuation – both to a buyer and their lender. Weak or less than ethical brokers will not only inflate the price but also the sellers expectation with the idea that instead of objectively and honestly communicating the truth to their seller that they can blame the market on revealing the true value of the business. Honest, experienced, and competent brokers will tell the seller what they need to hear rather than to reinforce the seller’s unrealistic value and final sales price expectation. In the worst cases it is the broker who unrealistically sets the expectation to secure the listing. In the best cases the broker will provide honest and objective price valuations even though the broker’s opinion of price may be poorly received by the seller.

This tends to be every seller’s dream but many times they will have to settle for a lower selling price in order to receive all cash at closing. Where we excel is our knowledge of SBA financing where it is possible. However, in recent years the SBA has required that some portion of the sales price include some degree of Seller Financing. Businesses which are strong, growing, have a great team in place, and have pristine financials stand the greatest chance of being financed through an SBA 7a loan which may not include Seller Financing. But, as above, banks (and buyers too!) prefer some Seller Financing as it shows the seller’s confidence in the business and its future. Having some skin in the game makes everyone more comfortable and providing Seller Financing usually results in the strongest final sales price. What is more, the ongoing stream of interest-earning income via a Seller Note can provide some tax advantages which may be worth considering.

We never tell the landlord anything until we have a signed agreement with the buyer. One we have the agreement in place the landlord is informed that a lease assignment is being requested and in most cases the landlord may not unreasonably withhold the lease assignment. Landlords can present the largest obstacle to a successful transaction and the ability of the broker to prepare for and anticipate landlord resistance are also the most successful.

Buyers typically finance their purchase of a business through an SBA loan, as it focuses more on cash flow rather than collateral assets. However, not all buyers or businesses will qualify for an SBA loan. In such cases, the buyer may have to obtain financing from a non-traditional lender, or Seller Financing. A great business broker will have multiple SBA lending sourced to pre-qualify their clients’ businesses. Keep in mind that the business must qualify as well as the buyer.

In most cases, you can be paid for the goodwill of a business if the cash flow of it will support the debt service. At the end of the day, goodwill must fit with the overall mathematical calculator which makes up the value of a business. This means that the business must still be able to provide a sufficient cash flow that can pay off the expenses and debts incurred by the business.

The usual training period lasts around 2–4 weeks, but it can be extended to satisfy the buyer in the purchase agreement. Our recommendation for transactions that involve Seller Financing is that our sellers agree to an additional period of transition. It can take the form of training via phone or video conference and works toward preserving the viability of the business which helps ensure the seller receives timely payments. Over the years, we have noticed that once a two-week training period is over, the buyer no longer wishes the seller to be present, but still wishes for them to be available to answer questions.

It may be inevitable and required by the lender, but it normally results in a higher selling price than when it is not offered. It also displays confidence in the future performance of the business, something that is appealing to potential buyers. It also has the benefit of deferring some taxes while simultaneously providing interest-bearing income higher than what could be obtained from a bank deposit.

This issue can arise in industries that a bank will not usually finance, such as fireworks or other high-risk businesses. These businesses might only find financing at high interest rates, making it nearly impossible to meet the debt service.

Information that contains material facts that can impact operations in the future must be disclosed to a buyer. Failure to do so violates the Representations and Warranties section of the agreement and can result in litigation. It is best to disclose them early on, because if they are discovered later the transaction is likely to be immediately terminated or result in a significant price reduction. If there is ever any doubt, seek advice from your broker or your attorney.

For brokerages, valuation is the likely price range at which the business is likely to sell. It can mean different things to different people and can result in different valuations. For example, a CPA or accountant rarely is able to provide a value that is indicative of what the business will sell for in the market.