How To Sell a Business – In Five Easy Steps. NOT!
Though you’ll find five tips and strategies on how to sell a business in this post, I’m just kidding about five “easy steps”. I mean, come on! Like hip replacement and peace in the Middle East, if it was easy, everybody’d be doing it!
Selling a business takes time and effort. It also takes specialized knowledge that can help you determine, among other things, what a particular business is worth, how to market that business, how the buyer might finance the purchase, how to negotiate the best deal, how to handle the closing, what comes after the closing and the sundry other aspects, large and small, that are part of the process. This post may be of some interest to novice business brokers as well as to business owners that are thinking of selling.
So, how DO you sell a business?
Well, this missive is written by a business broker – a Certified Business Intermediary (CBI), no less – so my simple answer is to enlist the help of a professional business broker; and the rest of this post may convince you to do just that. But if you want to try to sell your business yourself, I’ll give you some tips and specific steps to give it a try. But I warn you now that if you try to sell your business yourself, be prepared to spend a lot of time on the effort and to be very disappointed with the result. No matter how the attempt goes, I hope that, in the interest of reaching a satisfactory – perhaps even happy – conclusion, you will not get too far into the project before you contact a professional business broker.
Selling a business is serious business. How do you know what the right price is? Some owners think they can just pull a number out of the air because that’s the amount they “need”, giving no regard to what the market says the business is worth. How do you find buyers? How do you qualify those buyers? (There are a lot of tire kickers out there. If you don’t qualify each buyer early on, you’ll spend an enormous amount of time dealing with people who have no intention – let alone capability – of buying.)
Like some home owners, some business owners think they can sell their own businesses, a phenomenon know as a FSBO – For Sale By Owner. While it is possible that a home owner can get the information she needs to know how to price her house – number of bedrooms, number of baths, size of house, size of yard, etc. of other recent sales in the neighborhood from places like Zillow and Trulia – such detailed information on businesses is difficult to find and it always costs money to get it if you find a source for it. Some small business owners Google “how much do businesses sell for” and end up with all sorts of theories that almost never are pertinent to their particular business. (If it’s on the internet, it must be true, right?)
During our initial meetings with business owners we discuss the importance of valuing the business. We often hear that some friend or their accountant or their Uncle Mortimer said that a business generally sells for five times its net; or 10 times its net; or three times its assets or some other completely indefensible multiple. First off, it doesn’t. There is no set, easy-to-remember formula that can be used to properly value a business. Businesses in different industries sell for different multiples – different multiples of different numbers. Restaurants, for example, are valued differently than are healthcare providers. And even in the restaurant industry, valuations differ. A fast-food joint will be valued differently than an upscale restaurant. And even in the fast-food sub-category, a single mom and pop location will be valued differently than a 20-unit franchisee; and one franchise will sell for a higher multiple than another. I hope you get the point.
(And by the way, a private business selling for anywhere even close to 10 times net is the proverbial Black Swan.)
But what is “net”? Is it the bottom line of the tax return? Is it the bottom line of the P&L? No and no. An analysis of the business’ financial performance is critical for determining the “true net”, or what we call Discretionary Earnings (DE). Unless and until you know that number, everything else – especially value – is nothing more than a guess (and unlikely to be a good one).
Again, selling a business takes time, effort and specialized knowledge that very few people have. For some details about what is involved, check this out. As you read through that post, give some thought to each of those components and think about how much time would be involved for each one and whether you, a) have that time and are willing to invest it and, b) have the knowledge or access to the knowledge necessary to accomplish each. I’ll wait for you here….
Okay! Now you’ve got a vague sense of what this effort entails, let’s discuss some specifics.
Preparing for the Sale
Aside from an exit strategy, which few owners of small (less than $10 million in revenue) businesses seem have developed, there are some specific things you can do to get your business ready to sell. Remember that a business buyer, not unlike a buyer for anything else, will likely be more interested in and probably pay more for an “attractive” business than for an unattractive one. This element of human nature obtains in nearly every decision to buy whether it be a car, a house or a pound of tomatoes. If two similar items are on offer, the “best looking” will usually be the one the buyer gravitates to.
But what do I mean by making your business more attractive? What is “best looking”? There are two components to the “visual” appeal of a business: physical and financial. Both are important at particular points in the process and those two short podcasts will give you the details.
What’s My Business Worth?
Good question, Bucko! And getting that answer right is the crux of a successful transition.
Like anything else, there is a market for any business and that “market” will help us determine any business’ value. How can I state that with such certainty? Well, yours is not the first grocery store, auto-parts chain, home-healthcare provider, trucking company, wholesale/distribution business, accounting practice, etc. that has ever come to market. Hundreds of similar businesses have been sold. The sales prices of the sold businesses in whatever industry you play in can tell us pretty clearly what the market suggests is the value of yours.
There are three things, at minimum, that a business has to provide for a buyer and you should ask yourself whether your business meets those three basic requirements: adequate salary(ies); enough revenue to pay for itself and; enough revenue to provide a return on the buyer’s investment. A discussion of each can be read here.
There are many ways to market a business but before you choose one (or more), consider one important issue: Do you want to keep the fact that your business is for sale confidential? This is a very important upfront consideration because in most instances, if the fact that your business is for sale becomes public knowledge, the potential for this to cause a negative impact on the value of your business is significant.
For example, if your employees learn that the business is being marketed, they are very likely to become concerned about the stability of their position and may begin to look for other employment. If your customers learn that the business is being marketed, they may become concerned about the financial condition of your business and whether they can count on a continued supply of whatever product or service your business sells. If your competitors learn that you are selling, they may begin to poach your employees and customers, a process that will likely include speculation about the health of your business.
In almost every case, keeping the fact that the business is for sale confidential is critical to the health of your business as well as to getting the highest price for it at sale. For a deeper discussion on confidentiality, check out this podcast.
There are multiple channels in which to market your business including everything from online databases, some of which are industry-specific, to the local newspaper. Some owners, adhering to the “confidentiality-is-critical” school of thought, let their attorney and/or accountant know they want to sell hoping that a buyer might be found among the clients of those professionals. But think about how limited that audience is and keep in mind the old axiom that, if you want the highest price for your business it, like any item, has to be exposed to the largest possible number of buyers. An experienced business broker is FAR more likely to make that happen.
Financing the Business
Your buyer is likely to need to finance the purchase of your business and you would be wise to be ready to help, either by having some financing sources lined up or by offering some seller financing.
As far as lining some sources up, two excellent ones come immediately to mind. The first is your own banker. If you’ve been working with a banker for some number of years and that banker knows you and your business, this would be the first source I would go to. I would meet with the banker in advance of putting your business on the market to explain what you are doing and to “take her temperature” as to the extent the bank is interested in keeping the business as a client. The bank will still insist upon vetting the buyer to make sure that it is at least as financially capable and stable as you are but this source of funding is ideal for all concerned and will save a lot of time during the due diligence period as the buyer does not have to get a new lender involved.
Another excellent source of funding, at least in the United States, is the US Small Business Administration (SBA) which offers several excellent loan programs for both starting and buying businesses. (Buying an existing business, one with a track record that can be examined, is much more bankable than starting one. But that’s a post for another day…)
For an inside look at what the SBA process is and what kinds of deals they are looking most favorably at, check out this podcast in which I interview Dave Moore, an SBA specialist with Acclivity Financial, an SBA “preferred lender”.
An additional possible source of funding is, well, you! That’s right. As much as you may not want to hear this, unless your business is acquired by an institutional buyer such as a private equity group, or by a substantially larger company in a strategic acquisition, the chances that you will provide some of the financing needed by the buyer are pretty good. The vast majority of private business transfers involve some component of seller financing. To keep this and it’s associated risk factors to a minimum, consult with a business broker. That broker will likely have a list of potential lenders that specialize in the type of business you’re selling (another of the many reasons to use a professional business broker).
You’ve priced the business properly, you’ve marketed the business to the correct buyers (and, at the same time, have been able to keep the sale confidential); you’ve found a buyer that seems like a good fit; the contract-defined due diligence period has ended; financing has been committed by the lender; the day of closing is approaching and the final inventory has been scheduled. It’s time to head to the closing table. Let’s discuss a couple of last-minute issues.
- Inventory. If your business involves inventory, you or your broker would have estimated the value of that inventory at the beginning of the sales process. Unless you tell them otherwise, the buyers will assume that the inventory is essentially unchanged. However, the buyer may want a physical inventory taken the day (or night) before closing and expect the price to be adjusted to the extent that the inventory value on the day of closing differs from the value stated in your marketing. Though the purchase contract, especially if prepared by an experienced business broker or an attorney that specializes in business transfers, will usually address how this is handled, as a general rule, the parties will split the cost of having a final inventory done. If the value of the inventory on the date of sale is greater than what you’ve been claiming, the purchase price is adjusted upwards. If the value is less than what you’ve been claiming, the purchase price is adjusted downwards.
- Documents. Depending on many factors, there may be quite a few. If real estate is involved (which in most cases it will be), there are documents pertinent to that. The transfer of inventory and FF&E will require one of more bills of sale. If the sale includes any type of financing, notes, guarantees, financing statements and possibly deeds of trust will be required.
- Representation. In a nutshell, you need some. Either an attorney or a competent and experienced business broker – and sometimes both – should be representing you at closing. Are all the right documents prepared? Have you or you representative reviewed each? Are they all in the closing package? Have they all been signed by the necessary parties?
There’s a lot that goes into selling a business, especially of you want to receive the highest price with the lowest level of aggravation. Not many people are capable of pulling this off successfully. However, if you’ve found some value in the issues discussed in the posts and you’re interested in trying to sell your own business, I’m putting together a series of five short (sub-five minute) videos that elaborate on a couple of the above topics as well as a couple of others that are integral to selling a business. If you’d like to receive them when their ready, insert your email address in this box and I’ll email them as each is ready.
If you have any questions, leave them in the Comments box, below. If we get enough on the same topic, I may do a post or podcast tackling that topic specifically.
Finally, we’ve had several people ask if we have a course to teach them how to become business brokers. I’ve been thinking of putting together such a course and will do so if there are enough people interested in it. So, let me know your thoughts on this, as well.