Selling a Business: 5 Questions to Ask First
Selling a business is MUCH more than a financial transaction – it’s a life-changing event!
It takes time, talent and planning. And the planning part comes first because no matter how much time you’ve got or how much talent you hire, if the planning isn’t done correctly, the seller might be leaving money on the table – or the business may never sell at all.
Many businesses in the Main Street Market – as well as some in the lower Middle Market – don’t sell. There are many reasons for this; the most notable ones are price, crummy books and poor representation.
As professional business brokers, it’s our job to make sure that the business is priced properly, that our marketing efforts are supported with the highest quality presentation materials and, to the extent possible, that our client – who is almost always the seller – is actually prepared to sell.
This little trifecta is not always easy to accomplish.
Business owners often have an exaggerated opinion of the value of their business. This is one reason so many businesses come to market over-priced.
And this is particularly true if a business owner engages a real estate agent or an untrained business broker to find a buyer – neither of which has the knowledge or experience to value and subsequently price a business. The seller will almost always be disappointed and disillusioned with the process and the outcome.
We do valuations all the time and are generally the bearers of bad news. But in the more than 20 years we’ve been doing this, we’ve never had anyone argue with our calculations, methodologies or conclusions. We often hear, “but I need more than that”. Well, that may be so but no buyer cares what a seller needs and so part of the preparation process involves knowing what the business is actually worth before anybody tries to sell it.
Businesses come to market all the time – many thousands of them every year. The ones that sell – especially the ones that sell for something close to their value – usually have a couple of things in common; they are represented by a professional business broker/M&A advisor and that broker/advisor helped their client prepare for the sale. THIS is part of our job – and if we do it right, we’re probably going to enjoy a pleasant working relationship with our client – and a very handsome revenue pop when we all walk away from closing.
Selling a Business: Preparation
Preparing a business for the sale is a multi-faceted task. But it is only HALF of the preparation process. The other half is preparing the SELLER for the sale – and that’s the part that is too often ignored. The more thorough the preparation, the more likely a successful conclusion to the engagement.
To help sellers prepare for the sale of their business, here are a few questions that the seller should ask themselves – or, more specifically, we brokers need to ask the sellers.
- What are your plans for your life post-sale? As I mentioned at the start of this post, selling a business is a life-changing event. Many business owners are simply not prepared emotionally for the transaction’s aftermath. Most human beings – and business owners particularly – need to be productive; even if that productivity is in the sense of producing dinner by going fishing. We’ve seen too many instances of sellers, thinking they’ll ride off into the retirement sunset, who get bored with all their newly-discovered free time. They’ve gone from working 55-60 hours a week, with busy calendars and to-do lists to suddenly having no appointments, no one to call and no one asking them questions. Most of the people they know are still working – many of them in the industry they just left. When a business owner calls us, we have to ask them “what’s your plan for post-closing? What are you going to do?” These questions come from my personal experience and is something taught in our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“. Business owners who retire to nothing often regret it.
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to value and sell businesses.
Become a Professional Business Broker…
- Do you know what your business is worth, and will this be enough to afford the answer to #1? The owner has to know what their business is worth before making any decision to sell. You can’t just throw a number on it and say “this is what I want”. Nobody cares what the owner wants except the owner. The primary reason businesses don’t sell is because the price asked is too high. Price and value are two different things and the value must be determined before the price is. But even before the price is established, we have to ask the owner if the VALUE is enough to fund them through retirement – or whatever the answer to question #1 is.
- Do you plan to hire the right talent? Selling a business is not like selling a home. For one thing, confidentiality is crucial in what we do – a fact that immediately eliminates the vast majority of real estate agents as suitable representatives. The talent an owner needs is specific and can really be determined by considering question #2. The business needs to be valued, therefor a professional business broker trained in business valuation or a certified business appraiser has got to be part of the team. Taxes are guaranteed to impact how much the seller walks away with, so a CPA who specializes in tax planning is up next. To determine if the number the broker or appraiser arrives at is enough, a Certified Financial Planner should be on the team because, if that number’s NOT enough, some re-thinking is in order. And batting in the clean-up spot, a transaction attorney – NOT A DIVORCE OR SPEEDING-TICKET ATTORNEY – should be on deck. And to close the circle, we go back to a professional business broker to find the right buyer.
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- Are you willing to stay on with the business? Depending on the size and nature of the business, there is often a requirement that the seller stay on for a period that could last one or two years – or even longer in certain situations. Such a transaction is generally structured as an “earn-out” in which the seller receives maybe 75% of the acquisition price at closing and the balance over the earn-out period assuming that the business performs as required. The bigger the business, the more likely this will be part of the deal.
- Are you prepared to help with the acquisition financing? Something north of 75% of business acquisitions involve some amount of the financing being provided by the seller. In the United States, where many businesses are financed using SBA (Small Business Administration) guarantees, the SBA often requires the seller to hold some of the financing. A business owner needs to be prepared for this because, if they’re not, we run the risk of a deal that should be a sure thing collapsing just as we’re headed for the finish line.
Sellers Need to Know All This
As I’ve written previously, selling a business ain’t for sissies. Understanding the major components of the process is key and, once that’s addressed, preparation – in a logical sequence – becomes critical. And not just for the business. The sellers themselves need to be prepared for the multiple issues addressed above.
Too often, sellers are disappointed in the outcome of the selling process. Maybe the business hasn’t sold; maybe all the offers have been for less than the seller needs; maybe the realization that the owner’s business is also his or her life strikes the week before closing and with no plan for life AFTER closing causing cold feet. All of these conditions occur frequently and are generally the result of not having prepared properly. As professional business brokers, part of our job is to get the seller to answer questions.
From having a specific plan for what life will be like in the aftermath of the sale and knowing what their business is worth to determining a proper offering price and creating effective marketing materials, the preparation process is critical.
One of the most important things for a business broker to consider is this: if any business we’re engaged to sell does not find a buyer, we don’t get paid. Preparing the seller increases our chances of a well-satisfied client and an attractive payday.
The Bottom Line
As professional business brokers, we need to remember that any business owner considering selling is embarking on a journey with which they are completely unfamiliar. They need to be guided – to understand the pitfalls and how to avoid them. Our job is to help them grasp what needs to be done in order to assure that they have the best chance of completing that journey successfully.
Without proper preparation, the likelihood of success is small – in any endeavor – and the likelihood that we’ll get paid for the time and expense we’ve invested in the effort to find a buyer is therefore similar. We need to do everything we can to make sure that the likelihood of success is high.
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.