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New Rules for Selling Your Spa

William J. Lynott November 2010 issue of Skin Inc. magazine
hand with money

After a decade that saw business-sellers flourishing, the economic meltdown of 2008 ushered in a precipitous drop in business sales, mergers and acquisitions.

In fact, 2008 was the worst year in recent times, according to Bryan Adams of FactSet Research Systems Inc, New York. “Clearly, the second half of 2008 stands out as the bottom, when the market essentially collapsed. Now, although the market is still finding its footing, it does appear that it is moving in a positive direction,” he explains.

Although many veteran business brokers suggest that the worst may be in the past, not everyone agrees. Business broker Herman Petrecca of Business Connection Plus in Warminster, Pennsylvania, specializes in small-business sales and says that he is continuing to make sales, but many of them are buy-and-flips. “There are buyers out there, but many are looking to buy at distressed prices so that they can turn around and re-sell the businesses,” he explains.

Bernie Siegel of Siegel FinancialGroup in Conshohocken, Pennsylvania, takes a different view. “The small-business market has bottomed out, and the worst is behind us,” he says. “The poor economy of the past couple of years has resulted in many potential business-sellers holding off, and the result is a pent up supply of potential buyers.”

Adams agrees, “I believe that an owner putting a business up for sale now will find that there are buyers out there. There are deals to be done and willing buyers, so if you have a profitable, well-run and positive-cash flow business, you should be able to find a suitable partner and get some good value for yourself.” According to Siegal, “Owners should choose to sell a business when it makes personal sense to them. Owners do not usually sell companies driven solely by financial goals, but rather when it’s time to retire, move on, move up or whatever.”

Although this may or may not be the best time to put your spa on the block, any time is a good time to be getting it ready. If you have any notion of selling in the near future, take these steps to make sure that you bring a princess to market and not an ugly duckling.

Plan ahead

“Last-minute, emotional decisions to sell businesses seldom end up as satisfactory sales,” says business intermediary Dick Marsh of R.H. Marsh & Associates in Jenkintown, Pennsylvania. “I often receive telephone calls from business owners who have had a frustrating day. ‘I’ve had it,’ they say. ‘I want to sell my business.’ That’s a recipe for failure.”

Preparing a business for sale takes more than a few weeks of cosmetic touch-ups. Potential buyers will examine a business with a calculating eye, and unless they see the likelihood of an excellent return on their investment, they will move on. That’s the rub. Human nature being what it is, many business owners start to think about selling when business is slow and profits are sluggish. “That’s exactly the wrong time to sell a business,” states Marsh. “Nothing is more attractive to a potential buyer than a couple of years of solid growth in gross volume and net income. Nothing will scare off a buyer more quickly than a business that seems stuck in the doldrums.”

Because of this, preparing your spa for sale calls for bringing it into a state of good health. When it looks so good to you that you begin to wonder why you want to sell it, it’s probably ready for the market.

Have a realistic view

It’s understandable: You gave birth to the business, nurtured it and lived with it during good times and bad—it’s part of you. There is a genuine emotional attachment between you and your business. Realistically, however, a potential buyer doesn’t care a whit about your emotional relationship with your business. A buyer has one interest above all others: Can I make this business a success and what return can I expect from my investment?

That’s why you need to divorce yourself from emotional considerations and look at your spa from the viewpoint of a cold-hearted buyer. Any business broker can tell you stories about sellers who place unrealistic selling prices on their businesses because they are too emotionally involved to be objective. “The single most important piece of advice I can offer to a business seller is to develop an understanding about what your business is really worth,” says Siegel. “Trying to sell a company that is worth $100,000 for $500,000 won’t happen, and it can result in real damage to the business. During my 27-year career as a broker, I have witnessed how unrealistic expectations can have terrible results.”

Marsh advises, “Ask yourself, ‘Would I pay my asking price for this business if I were buying it?’ If the answer is ‘No,’ it’s time for you to re-evaluate.”

Document progress

“The first thing a sophisticated buyer will want to see is three-to-five years of financial reports in a form that follows conventional accounting standards,” explains Marsh. A prospective buyer or an accountant won’t be satisfied with claims that your spa is actually more profitable than financial records indicate. A seller who hopes to get a fair price for a business is going to have to demonstrate its true financial condition in black and white. You may or may not need full balance sheets and operating statements to run your business, but you most certainly will need them if you expect to sell it.

“When you’re ready to sell, you should have copies of all documentation related to the business—leases, a list of capital equipment, accounts receivable and payable, tax returns and more. It’s also important to have a written description of the business, a current marketing plan and projections for the future,” says Petrecca. It’s in this area that many small business owners come up short. “Make sure that your last couple of years of financial reporting are meticulously accurate, and be prepared to clearly validate any financial claim,” says Siegel. Paperwork may not be your favorite activity in business, but when it’s time to sell, any inability or unwillingness on your part to produce the required information will tarnish your offering in the marketplace.

Don’t drop the ball

“It’s not uncommon for a seller to neglect the business once it’s been put up for sale, and that’s a big mistake. Any evidence that a business may be going downhill is a serious red flag to prospective buyers,” explains Marsh.

Don’t make the mistake of thinking you can charm potential buyers with excuses or rosy projections of what your spa could be under different circumstances. Instead, you can expect them and their accountants to cast a jaundiced eye on your past and present performance as a gauge of actual market value.

Prepare a seller’s document

Although you may never have heard about a seller’s document, when you decide to sell your business, it can be an extraordinarily valuable tool. A seller’s document tells prospective buyers about your business and why they should buy it. A good one will contain, at the minimum, a brief history of the business, financial highlights throughout the past few years, observations about your local market, prospects for growth and an honest look at the competition.

Although large businesses often create elaborate brochures with glossy photos and lengthy chapters, most spa owners need not go to such lengths. A two-page summary neatly typed and grammatically correct is often enough. The content is the most important aspect. If you engage a business broker to sell your business, she will be able to help you prepare your seller’s document.

How can you tell if it will do the job? “A good seller’s document will answer 80% of the questions that a prospective buyer is likely to ask,” says Marsh.

Decide what you will tell employees

For a variety of reasons, many sellers are reluctant to tell their employees that the business is up for sale. According to Marsh, “That’s a mistake. They’re going to find out eventually. In fact, it’s almost impossible to keep employees from knowing that a business is for sale. When they eventually find out, resentment is certain.”

“An owner should definitely inform employees about a plan to sell the business,” says Petrecca. “If they find out from anyone other than the owner, they will almost certainly lose their respect and loyalty. That, in turn, could influence prospective buyers.”

The timing and the manner of informing employees are sensitive details. According to Petrecca, “It’s important to respect your employees’ concerns about their futures. Anything you can do to demonstrate your concern for them will help everyone.”

Consider professional help

Obtaining assistance in preparing your seller’s document is not the only reason that you should engage professional help. It is very difficult for the typical business owner to place a realistic price on a business. Using a professional business broker to sell your business is likely to bring the most satisfactory results, including the best net return for the owner.

However, if your business is small—anything under $1 million in annual sales—it may be difficult for you to find a broker. Or, you may be reluctant to pay a broker’s fee, which typically range from 8–10% of the first $1 million, and scale downward after that. If you intend to put your business on the market without the services of a broker, you need, at the very least, a good accountant and a good attorney. Both should be experienced in business sales.

The sale of a business, even a very small business, is a complex transaction rife with potential frustrations and legal pitfalls. Marsh summarizes it this way: “If you’re like the great majority of business sellers, you’ll do the job only once in your lifetime. That means you need to get it done right the first time.”

William J. Lynott is a veteran freelance writer who specializes in business management, as well as personal and business finance. His work appears regularly in leading trade publications and newspapers, in addition to consumer magazines such as Reader’s Digest, AARP Bulletin and Family Circle.

 

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