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A Handbook for Selling Your Distributorship

To Sell or Not to Sell
Deciding to sell a business is a complex emotional decision that is much easier to talk about than it is to do. The sale of a business also has great financial ramifications. Older business owners should scrutinize their incomes and savings to determine how much they need to reap from the sale of their businesses to live comfortably. A careful analysis with the help of an accountant or financial adviser will tell you if it is realistic to sell your business now or wait a few years. If you have children who work in the firm, evaluate their skills and ask their plans. Owners who want their children to succeed them obviously will not want to sell their companies. Conversely, if your children have careers outside your company, selling may be the best move.

Business owners should consider what they will do after they sell their firms. Many company principals have spent much of their lives, including evenings and weekends, running their businesses. When they retire, they realize they would rather be working. Realize, however, that a forms distributorship will be worth a lot less to a prospective buyer after you die. Evaluate whether you could work for a prospective owner and under what conditions. Owners of small, closely held companies such as forms distributorships often can increase the price paid for their companies under an earn-out arrangement.

Increasingly, owners of small distributorships are finding it profitable to merge with larger companies long before retirement age. This way, they can offer many services they couldn't as a small company, such as warehousing and delivery. They become eligible for volume discounts from suppliers and benefit from an increased support staff. By giving up the hassles of running their own firms, some owners have even increased their incomes.

The Bottom Line
A crucial step in any plan to sell your business is valuation. Unfortunately, many small business owners are disappointed to find out their firms are worth a lot less than they think. Several factors may lower a company's value, including sloppy record-keeping, lack of audited statements and a high concentration of business with too few accounts. The valuation process is especially difficult for service companies such as forms distributorships because so much of the business worth-the customer list-is an intangible asset and thus hard to value. There are many possible valuation methods, and valuation experts may use several to reach an estimate. Remember that a value is simply a guideline-it doesn't mean you'll actually be able to sell the firm for that amount. Consult an expert for assistance.

Get Your Financial House in Order
Closely held corporations are usually set up to minimize taxes, not maximize profits. The balance sheets and income statements might be misleading to a prospective buyer, so sellers may want to restate the balance sheet. For example, expenses that include perks for the company principal often will be reduced or eliminated under new ownership. By restating expenses, prospective sellers can increase earnings accordingly. Check with your accountant.

Get Rid of Excess Inventory
Buyers will not want to purchase outdated or unusable inventory. Sell it, use it yourself, give it to charity or return it to vendors, if possible.

Clean Up Your Act
Look around your office. Are there piles of forms management reports scattered about? Is the paint on the ceiling peeling? Your facility may present a negative image of your company and affect the buyer's opinion of your management skills. Additionally, if the buyer plans to purchase your facility, a run-down building will fetch a lower value than one in top shape.

Conduct Regular Customer Surveys
Savvy buyers will ask many questions about your company, including its relationships with customers. Results of a customer survey can help support your analysis of the firm. Are some, many or all customers price buyers with little loyalty? Is your company well known and respected in its marketplace? A survey done by a third party will carry more weight with a potential buyer.

Plan Now for the Future
Even if you don't plan to operate your business five years from now, you'll want it to be attractive to potential buyers. Work now to increase profitability, broaden your customer base and broaden your company's sales force. Are there niche markets you can focus on? Can you empower employees to do more so the business is not solely dependent on you, thus increasing its attractiveness to prospective buyers?

Search for the Right Match
Once you decide to sell your company, you need a buyer. Some distributors have contacted friendly competitors about a merger or acquisition. Others have placed "for sale" advertisements in business publications. NBFA's members-only management newsletter, the Independent Management Report, accepts classified ads from NBFA members interested in selling or buying businesses. Often, prospective buyers and sellers disclose their intentions at Regional Roundtables, Trade Marts and other industry events.

Drafting an Offering Document
An offering document briefly explains your company's past and plans for the future. The document should explain why your business is available for a merger or sale and provide an overview of the company's services capabilities, markets and customers. It should review financial statements for the past few years and discuss any necessary adjustments to the financials, as discussed above. The offering document is an opportunity to sell your company-stress its capabilities, strengths and resources and explain how it is positioned to compete in the future.

Deciding on the Right Fit
During discussions with prospective buyers, you must decide if a prospective merger or acquisition "feels right." Deals have been undone by differences in management styles and personalities of the principals. Does it matter whether a large or small company buys your firm? Could it be a manufacturer or a distributor? A company that sells direct or only through distributors? How important is location of the business to you? Is the buyer trustworthy? These are just some of the issues to consider.

The Letter of Intent
After the buyer and seller have reached an agreement in principle, they want a letter of intent to prove that the deal is near consummation. The letter of intent goes beyond generalities, but often raises more issues than it resolves. The letter of intent is rarely a binding contract. Also called a "term sheet," it summarizes the form of transaction, discusses if it's an asset deal, and if so, which assets and liabilities are included and excluded. It also discusses the payment terms and major conditions for consummating the transaction, such as if the seller has to maintain a certain level of earnings or sales during the period prior to closing.

The Art of the Deal
Books have been written about structuring the deal and negotiating it. Your attorney and other professional advisers can help. Be prepared to compromise, but also know the minimum price you will accept as well as certain conditions that are important to you. Obviously, urgency dictates to some extent how flexible you must be. Someone who wants to sell a business within a few months probably will need to bend more than someone who has longer to weigh options. Always consider tax implications.

Surviving Due Diligence
The due diligence inquiry allows the buyer to gain a detailed understanding of the seller's company. It eliminates intuition and gut feelings by allowing hard access to facts. In some cases, the buyer will find out that what the seller represented about the company is not entirely true. The buyer's attorney or accountant will take the lead during due diligence. Part of due diligence includes review of all documents related to the company, including financial statements, leases, loans, employment contracts, forms management contracts, bankruptcy or creditors' agreements, agreements on royalties, licensing or franchising, tax records, agreements with suppliers, consultants and former owners or employees, insurance policies, pensions or profit sharing plans, correspondence with all government agencies in the last five years, including the Occupational Safety and Health Administration and the Internal Revenue Service, and documents relating to any lawsuits involving the company.

A Look at The Purchase Agreement
Purchase agreements are lengthy documents that outline the terms of the deal, including the stock or assets to be transferred, the mechanics of the transaction and provisions for financing. They include representations and warranties of the seller and buyer, conditions to be met before the deal is closed, and covenants of the seller pending the closing. They also outline the provisions for closing and indemnifications by the seller of the buyer.

Representations and warranties are a way of saying, "Here is what my business looks like at this moment," and are usually accompanied by references to documents such as financial statements and schedules of equipment. Covenants are promises or agreements to do something. For example, during the period before closing, a seller may agree not to buy any major equipment without the buyer's consent. Conditions may include a large number of items, but at the least require that all representations and warranties be true at closing and that all covenants will have been performed at closing. They also include certification from officers confirming the above and receipt of various legal opinions.

-Katherine L. House