Sell a Business Quickly
Want a fast exit? That tells me a lot, little of which is good. An attempt to sell a business quickly strongly suggests lack of preparation and if you’ve been reading these blog posts for any length of time, you know that lack of preparation is likely to lead to problems during the transaction and probably a lower price for your business. But not withstanding that fact, business owners come to us on a regular basis asking if we can sell their business quickly.
How to sell, how to prepare and how to plan are all discussed in many earlier posts – and will certainly be discussed in future ones – so there’s no sense in rehashing all of that in this one. This one focuses on only one aspect: price.
What you’re about to read is true. I’ve changed are the names to protect the guilty.
A Tale of Two Sales
Several years ago, I listed two businesses in the same geographic area in the same year. As is standard procedure for a professional business broker, my office performed a valuation – essentially an appraisal to establish the value of each of the businesses. As you’ll see shortly, this is arguably the most important step when trying to sell a business, whether you’re the business’ owner or the business owner’s broker.
In both cases, we produced our standard valuation package, a roughly 15-20 page document with graphs, references, justifications, conclusions, a most probable selling price and a suggested asking price. I met with the owners of the individual businesses and reviewed what our research turned up, our process for establishing value and how I suggested they should proceed. It was at this point that the stories begin to veer wildly in different directions.
Company A was a small chain of dessert shops selling ice cream, yogurt, cakes and sundry other desserts that could be consumed on site or carried out. Company B was a regional building supply and hardware store. Company A had annual revenue of roughly $4.5 million while Company B had sales of about $7.2 million. Both businesses bought at wholesale and sold at retail. Company A was – at five years old – relatively young. Company B had been around for many years.
The three owners of Company A reviewed our valuation and discussed among themselves whether they thought it had merit. They did. Though they would have liked their business to have a higher valuation, they could not find anything in our report to argue with and about 10 days later called to say “Let’s get this ball rolling.” We drafted a listing agreement, began collecting the necessary data, put together a marketing plan and started the roll-out.
The Flip Side
The owners of Company B, on the other hand, were disappointed in the valuation we arrived at for their business. They thought their business was worth more than what we suggested it was worth but they could not find fault with any aspect of our valuation. And it was at this point that we heard the phrase that all good business brokers dread: “We need more than that.”
If you own a business – or a car, or a house, or a litter of pure-bred border collie pups – what you “need” is meaningless to everyone on the planet except you. But you’re not selling to you. You need to know what pure-bred border collie pups are fetching in your area. You need to know what cars of the same year, make and model with similar mileage are fetching. You need to know what similar houses are selling for. And, like any of these items, you need to know what similar businesses, generating similar returns, are selling for. Though you can price your business at any level you like, if you want to actually sell it, you need to adjust your expectations to the market.
When the owners of Company B told me that they needed more than what we valued their business at, I explained that what they needed and what the market said the business was worth were two completely different things; that there were always many businesses for sale at any one time and that, in order to attract the largest number of potential buyers, we had to be competitive on price – because that is the basis for a buyer calculating his or her rate of return.
But we needed some exposure in the area that Company B was located and, though we generally don’t do this, decided to take the listing even though it was overpriced by about 50% – and we cautioned the sellers that we were pessimistic about succeeding in finding a buyer at that price.
But back to Company A…
The owners of Company A agreed to list the business at the price we suggested with the target number being the one we thought it was worth. In 30 days we had several offers and we were able to negotiate two of them up – to the point that we actually were able to make the deal at the full asking price. Listed, marketed, negotiated and closed in four months!*
* Almost NOTHING sells this quickly. Don’t be misled. A properly-priced mid-market business will take 10-12 months to sell – and often much longer.
With Company B being offered at 50% above market value, we got many inquiries but no offers; nothing for about six months. Over the next six months, as inquiries continued to come in, we finally received two offers – but they were uncannily close to what we had originally valued the business at and the owners rejected both. So, at the end of a year of effort, I sat down again with the owners and reviewed what had transpired.
Plenty of inquiries and only two offers, both of which were realistic but for less than the sellers wanted.
We chatted. “Do you really want to sell?” “Yes.” “Do you see what the problem is?” “Yes.” “Are you ready to adjust the price?” “Yes, but not to the level you suggest.” (Sigh…)
We dropped the price 15%. We’re now about 25% overvalued. We continue to get leads and over the next four months received another offer, this one also about where we valued the business.
I had another sit-down with the owners who, after 16 months, finally agreed to drop the price to what we suggested the business be listed for originally – close enough to illustrate value but high enough to allow room to negotiate. In 30 days we had a buyer. Two weeks later we had negotiated the price (within 2% of what we valued the business at 18 months earlier) and in 60 days the deal was closed.
The lesson, of course, is to price your business correctly if you want it to sell. We’ve had our share of owners that just wanted to see what kind of activity they can attract if they “float” their business as possibly for sale. We don’t take such engagements because they are generally a complete waste of time. And we won’t even consider taking an engagement unless we’re hired to do a valuation first.
When bringing a business to market, there is a very important concept to grasp; can the valuation – the asking price – be justified? If it can’t, why waste your time and that of potential buyers? You’re dealing with people who have options. They can buy any of a thousand businesses. They can invest their money in dozens of other opportunities. And the ONLY reason they’ll consider your business is if it offers a competitive rate of return on their investment. This begins and ends with the valuation of the business and the price it bears when it comes to market.
If you’re interested in finding out what your business is worth, we can do that for you. Simply contact me through the comments box at the end of this post or contact me directly at the email address below. However, if you’d like to get started on your own, I’ve put together a list of some of the documents and data that you – or any professional business broker – will need. It’s free. Just tell me where to send it.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. For example, if you’re considering acquisition as a strategy for growing your business, what are your concerns about the process? What help would you like?
If you’re a business owner that is considering selling, what aspects of the process worry you? Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
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