12 May Eight Things Every Seller Should Know
You’ve devoted untold time, money and energy to building and running your business. It may well represent your life’s work and net worth. Now you’ve decided that it is finally the right time to sell. Here are eight things you should know.
- Financially, You May Be Better Off Keeping Your Business. Buyers buy businesses for the income they can receive. They look at past profit performance to predict the future and then pay a price that will allow a fair, risk-adjusted return. Small businesses sell for 3 to 5 times pre-interest, pre-tax earnings. If your business generates annual benefits to you totaling $500K, which includes $200K for managing the business, the true profit of your business is $300K. A buyer might pay $1.2 million. Some seller financing will probably be required as well. But assume you receive all the cash at closing, pay your taxes and expenses, pocket $800,000, and invest this sum at 5%. Your annual income will now be $40,000. You’ve taken a major pay cut. In short, selling a business may be more like buying your freedom.
- If Your Primary Pitch Is “This Business Could…,” Save Your Breath. Buyers of private businesses are a conservative bunch. If they are not, their bosses, lenders or financial backers will require them to be. As such, they must rely on solid historical performance to justify their purchase price. Business sellers who try to peg most of the value on what the business “could” do typically waste everyone’s time and lose credibility. Buyers don’t have to buy. They only put their money at risk when they find a good deal. If you take an impartial view and think you wouldn’t do it … it’s likely nobody else will either.
- To Maximize Value, Be Open to Seller Financing. If you ask for 100 percent cash at closing, experience shows you’ll typically receive a much lower total price. This is because the amount of cash that the buyer has and the amount the bank will lend are usually relatively fixed amounts. The sum of the buyer’s cash and bank financing is the maximum you can receive at closing. Now, would you like more? Offer some seller-financing. Worst case is you don’t get paid your entire seller-financing portion, but you still received more than the all-cash price!
- They Won’t Appreciate the Work That Went Into Building Your Business. Unfortunately, buyers look at your business simply as an investment. They won’t appreciate the blood, sweat and tears you put into building it. You’ll always have the pride of knowing what you accomplished and the respect of those who watched you do it. Don’t expect any more from a buyer than a fair price. Oh, and don’t bother with the “this business is so very unique” shtick. Every business is unique. Buyers just care about the cash it generates.
- Buyers Love It When You Represent Yourself. In fact, many buyers looking for the best deals will exclusively target private business owners who have no representation and have little prior experience of buying and selling businesses. More often than not, they’re going to end up squeezing you for a better price for the business than they initially promised and you initially expected. They will flatter you in the early stages and become aggressive in negotiations in the latter stages. Few sellers are experienced in business sales or valuation. All sellers are emotional when it comes to selling their “baby.” No seller is objective. As the saying goes, “If you represent yourself, you have a fool for a client.” Do your heirs a favor and hire an expert to assist you. Choose right and they’ll more than pay for themselves.
- Your Competitors May Not Be the Best Buyers. Sure, competitors are logical buyer candidates and quite easy to identify. So you contact the owner of XYZ and ask, “Are you interested?” Now he has a free chance to gather information that will help him compete against you. And even if you don’t send him your confidential information, he’ll use the fact that you want to sell against you – starting today. Oh, he competes in a different territory? These buyers won’t pay as much because the skill, expertise, processes and methods of your company are less valuable to those already doing what you do. More often than not, the better (and lower risk) buyers are individuals, financial buyers or companies in related or adjacent industries.
- You Need More Than One Good Buyer. If you want to sell and you have just one buyer, who has whom? The business sale experience can be extremely frustrating if you just deal with one buyer at a time. The buyers will have all the leverage. The key to getting a good deal done in a timely manner is to work all the qualified buyers simultaneously. Get all their offers around the same time and then you have choices, and leverage, and each buyer’s competitive instincts will kick in. Choose the best and if he stumbles, go right to the second best. Buyers need not be coddled. Sure, you are a nice person, but you don’t have time to waste. You have a business to run and you are either going to get a deal done or keep the business and continue enjoying all the money it makes. This is how you should run the process and the attitude you should show to buyer prospects.
- Quiet Is a PART of the Plan, Not THE Plan. Confidentiality is important, but if you make it your #1 consideration, you’ll never get anywhere. The key to confidentiality is to move swiftly and get the deal done before the grapevine has the chance to do its thing. More particularly: A) Don’t start the process (or talk to anyone) until you’re sure it’s what you want; you have a good estimate of what the market will bear (price and terms) and such is acceptable to you; you have all the offering data ready; and you have identified all the buyer candidates. B) Reveal your intentions only to buyers who have the motivation and money to really make the purchase. C) Introduce the opportunity to all the good buyer candidates simultaneously. D) Make sure each knows you’re serious about confidentiality and if they breach it, they’ll be eliminated as a buyer candidate. E) Run fast and get a deal closed in a timely manner. F) Tell everyone that you have a great business but have some other things you might like to do. If you find the right buyer at the right price, you might take it. If not, you’ll keep the biz and enjoy it and the opportunity is off the table.
The intent of the above tips is to save the business seller time, money and frustration. If the time is not right, focus your energy on growing the business and posting solid performance, then enter the market. When you do, keep in mind that selling a business is a sales activity. It’s not a passive process. It’s proactive. Doing it right takes a lot of time and energy. It requires some urgency. Even though it is done discretely, selling a business successfully requires the same elements as any successful sale: preparation, presentation, representation and negotiation.