Selling a Business? 3 Mistakes to Avoid
20 December 2021: Selling a Business: 3 Mistakes to AvoidSelling a business is a time-consuming and arduous process. And it’s particularly challenging if you don’t know what you’re doing – and that refers to pretty much everybody with the exception of trained professional business brokers and M&A advisors. Yes, there are plenty of business owners and real estate agents – and even a few accountants – that try, but rarely successfully. In fact, we get contacted all the time by owners and realtors who’ve had zero luck selling a business. But it takes us only a few minutes to identify why such owners and realtors – professionals in their own field but amateurs in any other – couldn’t make it happen. In our course on learning how to value and sell businesses, we identify roughly 15 reasons why businesses don’t sell. This post is about the top three.
The NumbersIt may surprise you to learn that roughly 80% of businesses in the Main Street and Lower Middle markets – businesses with valuation of up to about US$25-$30 million – that come to market don’t sell. But we have to remember that this number, as high as it is, includes those offered by real estate agents – who have no idea how to value or market a business – and the business owners themselves – so-called FISBOs – who nearly universally have an exaggerated opinion of the value of their business. That said, every business that doesn’t fail will sell. The missing qualifier here, though, is “eventually”. Yes, we’ve seen business owners simply give up on selling and quietly close their business leaving who-knows-how-much-value to simply evaporate into thin air. Somebody who wants $3.5 million for a business worth $2.75 million is guaranteed to be disappointed that no buyers have appeared after marketing the business for two years. But to give up and close the business is to leave $2.75 million on the table. A little dumb in my opinion but it happens. One recent client was so discouraged that the offers received for her business – three of them all for around 25% less than she’d hope to get – that she decided she was going to just operate the business for another two years and then shut it down. She was not going to spend the two years growing the business but instead planned to gradually scale it back until she could walk off into the sunset. This decision will leave roughly $800,000 of value on the table. Instead, she could use that two year period to grow her business to achieve the value she wants by paying attention to the aspects of her business that drive values – what we call the “value drivers”. In most businesses, the value drivers can be identified. Once we know what they are, the owner can focus on them and the result, over time, should be apparent in the business’ increased value. But back to the topic at hand… So, what are the three mistakes to avoid? Let’s take a look.
1) Not Getting the Business Professionally ValuedThe primary reason businesses – or anything else, for that matter – don’t sell is that the price is too high. As I’ve repeatedly stated over the years, business owners generally have an exaggerated opinion of their business’ value. This is the main reason to get your business valued by a professional. You may not like the result but if you know how the market is likely to view your business, you will save untold amounts of time, energy and aggravation. But business owners having an exaggerated opinion of their business is understandable. The business, after all, has probably provided the owner’s family with a comfortable living, a nice house, education for the kids, maybe a place in the islands.
We offer a comprehensive coaching program specifically tailored to Realtors that want to sell businesses, business owners and to anyone that wants to become a business broker.
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But when selling a business, the value is what the market suggests it’s worth; not what the seller wants – and we see a disconnect between the owner’s value and the markets all the time. It’s critical that the owner of a business get that business valued – by someone that has been trained in how to value businesses. Not your accountant, your daughter’s boyfriend, your dentist or your brother-in-law, the stock broker. Selling a business takes time – usually six to 12 months, and sometimes more. If the owner’s price expectations exceed the market value, everyone involved will be spinning their wheels in what is likely to be a futile effort to find a buyer at the owner’s price.
RepresentationWhen you need work on your teeth, you go to a dentist. When your car needs work, you take it to a mechanic. When your knee needs replacement, you go to an orthopedic surgeon. When you’re ready to sell your house, you call a real estate agent. A schmaat cookie will, when needing something done, find the right talent to get that something done. Like anything else in life, when selling a business, you should hire the right talent. ___________________________________________________________________________________________________
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to value and sell businesses.
Become a Professional Business Broker…It amazes us how often we get contacted by real estate agents asking us to help them sell a business for which they’ve been unable to find a buyer for 12, 18 or 20 months. But at that point, there’s not much we can do to help; the damage has been done. As a rule, we’ve found that real estate agents are extremely talented at what they do – selling houses – because that’s what they’ve been trained to do. But we’ve also found that they’re not very good at selling cellphone services, solar panels, construction equipment, French cheeses or licensing rights to trademarks; because they haven’t been trained in how to sell these things. But that’s the same reason that they’re not very good at selling businesses. If you’re a business owner thinking about selling a business and you’re speaking to a real estate agent about it, remember this one simple thing: no one, in the history of the world, has ever gone to the local multiple listing service (MLS) looking for a business to buy. No one. If you’re serious about selling a business, act like it. Find someone who knows how. Like getting your knee replaced, the job will likely be FAR more successful – and significantly less painful – if you hire someone that has been trained to do it.
PaperworkWhen selling a business, ideally you want to make the process of buying easy for the buyer. Makes sense, no? If your files, contracts, financials, tax returns, bank documents and all the other important documentation related to your business look like a giant grabbed your office or place of business and violently shook it for 15 or 20 minutes, you will lose most, if not all, potential buyers before you even have a chance to set up a second meeting. Crummy, confusing, incomplete or non-existent documents and files will stop any serious discussion in its tracks. A professional business broker knows what’s needed, how it should be formatted, how and when it should be presented, and how to keep all this confidential information, well, confidential.
The Bottom LineWhen selling a business, hiring someone untrained in the profession is likely to generate the same result as hiring someone untrained in orthopedics to replace your knee. The pain may be different but it will be painful. And if your business is worth something in the mid-six figures or more, the cost will be even greater than correcting the knee problems that results from having your real estate agent or dentist do it. If you’re expecting an outcome like one depicted in this commercial, you’re likely to be terribly disappointed. 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.
Searching For…This week’s “Searching For” item: U.S. based provider of any of the following services: commercial refrigeration, food safety and compliance, water management and other B2B services) with Revenue between $5 million and $25 million. If any of you know of something that might fit, please let me know.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.