Selling a Business: 2 Potential Problems
10 January 2022: Selling a Business – 2 Potential Problems
As I’ve written previously, selling a business requires preparation. But even for those that thoroughly prepare, problems are almost certain to pop up during the process.
To be successful when selling a business, anticipating and, to the extent possible, steering clear of these problems will make life a whole lot easier.
Problems of all kinds can and will erupt during the process of selling a business. But business owners and brokers can significantly improve their chances of successfully selling a business by getting two major potential problems off the table before even getting the engagement agreement signed.
The Valuation Conversation
When selling a business, determining a reasonable, market-based price for the business is Job One. We’ve found this to be the most challenging aspect of the initial engagement phase.
Quite often sellers have an exaggerated opinion of the value of their business. We have to advise our clients that there is a mathematical approach to determining value and that if we don’t take this critical first step, the chances of a successful sale are remote.
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Knowing the business’ value and setting a reasonable price on the business are the first steps in the process.
The seller needs to know how a value is established and what aspects – financial, market, etc. – impact value.
For example, no matter what their business is, we always tell clients that theirs is not the first business of its kind to be sold. Whether it’s a convenience store, a specialty manufacturer, a small distribution company or anything else, it’s highly likely that businesses that are quite similar and in the same industry channel have sold before.
What did buyers pay for those businesses? Knowing this tells us… well, what buyers are willing to pay for our client’s business – more specifically, for its financial performance.
Another key aspect of value is competition.
How many similar businesses are currently being offered – and how many are likely to come to market in the near future?
Anyone who has followed this blog for any period of time is familiar with the terms “Silver Tsunami” and the “Baby Boomer Business Sell-Off“. Baby Boomers are more likely to be business owners and they’re hitting retirement age at the rate of 10,000 per day!
For the past few years it has been a buyer’s market – and it’s likely to remain that way for years to come. There are a lot of businesses coming to market over the next decade or so and our clients need to know that all of these businesses will be competing for those buyers. In such a market, price is crucial.
A properly-priced business will take between six and 12 months to sell – and possibly longer. But a significant portion of business owners never manage to sell their business, a fact that our clients need to know early in our discussions with them. And the reason for this is usually the seller’s unrealistic price expectation.
Unlike home buyers, buyers of businesses are unlikely to get emotionally involved in any business they’re investigating. In the infamous words of Ilhan Omar, “It’s all about the Benjamins, baby!” For financial buyers, it’s the answer to the question, “how much money will this business put in my pocket?” And when selling a business, you need to know whether your buyers are likely to be financial or strategic.
Some business owners refuse to have their business valued – a mystifying decision that’s almost guaranteed to have one of two results: 1) the business will never sell or, 2) the seller will leave money on the table.
If you’re a seller, get your business professionally valued. If you’re a business broker, seriously consider avoiding taking engagements where the seller refuses to have a valuation done – by you or any other qualified professional.
What’s Next? What’s the Plan?
For most business owners, their business is their baby and selling it is a very emotional event. If the sale and its aftermath aren’t properly planned – if there is no specific plan for life after closing – a terrible case of seller remorse can quickly afflict the seller causing a level of regret that can be sickening to see.
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to value and sell businesses.
Become a Professional Business Broker…
Those of you who know my story – and the reasons for starting Worldwide Business Brokers more than 20 years ago – know that I have personal experience with this. Planning for what’s next is as important as planning the sale.
In our experience, business owners are “doers”. They need to be doing something. They need to be productive. If they’ve spent the last 10-15 years working in and building their business, waking up the day after closing and not having their business to go to – or something else, specific, to do – can be extremely unsettling.
When I sold my business in the late 1990s, I was completely unprepared. My business wasn’t even for sale. The disorientation set in the morning after the closing took place. The next few weeks were extremely distressing and it wasn’t until I came up with “what to do next” that I was able to slowly regain my equilibrium.
What this means for business brokers is that a seller with no plans for post-closing may realize at the 11th hour that they really don’t want to sell. Their personal identity is their business. That is how they’re known and how they identify themselves. They’ve got nothing else to do.
As sad as this may be, it has the potential of derailing the deal at the very end of a 10- or 12-month journey during which the broker has expended quite of a bit of marketing money and countless hours shepherding the deal to the closing table.
The Bottom Line
Selling a business ain’t for sissies. An expression I always use with new brokers is, “If it was easy, everybody’d be doing it.” But avoiding the easily-avoided mistakes can make the process far less challenging.
The key takeaways from this post are these:
For business owners, hire a professional business broker or business appraiser to determine your business’ value. Know what it’s worth before deciding to sell.
Also, have a post-closing plan. It doesn’t matter of that is to play St. Andrews, Pebble Beach and Augusta, climb Kilimanjaro, sail around the world or teach kids in third-world poverty how “business” can be their lifeline to a better and rewarding life.
Know what that plan is long before bringing your business to market.
For professional business brokers, taking on an engagement to sell a business that has either not been valued or that the seller wants significantly more for than what you’ve valued it at, risks wasting months of time and thousands of dollars.
There are plenty of businesses coming to market (see “Baby Boomers”, above) and you’ll have plenty of opportunities to represent ones whose owners understand not only the need for a valuation but also the value of your time and expertise.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. 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 safe and profitable week.
We have a buyer for a southeast U.S.-based specialized manufacturer or provider of business and industrial services with EBITDA between $3 million and $25 million.
If any of you know of something that might fit, please let me know.