Selling a Business: How Long Does It Take?
23 May 2022: Selling a Business: How Long Does it Take?
How long does it take to sell a business? We get that question all the time, too!
As you can probably imagine, the answer depends on a number of factors, not least of which is whether the business is priced right.
But there are other issues that impact the time a business will take to sell including the industry it’s in, where it’s located, whether the business owners try to sell it themselves, whether the seller will consider helping with the financing, whether a professional valuation has been done, whether the price the owner wants bears some resemblance to the value of the business, etc.
As a rule, a properly-priced and properly-represented business takes between six and 12 months to sell – but it can take much longer if the buyer pool is small, the business is specialized or any number of other factors obtain. The first business I listed – about 20 years ago – sold in four months. The second, took 16 months. (I’ll explain why in a moment.)
But for this discussion we’ll assume that the business is priced correctly, operates in an industry with a decent economic outlook, is located in an area where people want to live and that the owners have hired a professional business broker to handle the job. So, let’s look at some of the issues that impact the time from start to finish
Phase 1: Data and Valuation
The first phase of the project is gathering the necessary information. Very little can be done until the data is in the hands of the broker.
Depending on how diligent the business owner has been in keeping the business’ financial and operational data current and orderly, it can take at least two weeks – and often longer – to get the necessary material to the broker. Until the broker gets this data, there’s very little he or she can do because all the follow-on phases – valuation, buyer avatar, marketing, financing sources, etc – depend on the completeness of what the owner produces.
Any business that is coming to market has to be valued and that valuation depends on the financial and operational data that the owners must provide. A comprehensive valuation – work that will result in a valuation package of roughly 15 and 30 pages in length – will generally require at least 10 days of research, projections, calculations and the drafting of the final document. For most valuations, we quote between two and three weeks.
Don’t want a valuation done? Good luck with trying to justify an asking price to a potential buyer!
Phase 2: Marketing
With a valuation done and a marketing price determined, marketing can begin. Or can it?
Well, no. Marketing a business for sale is a multi-pronged event – and remember that it has to be done confidentially.
Where should it be marketed, how should it be marketed and to whom should it be marketed? Not only do these questions have to be answered but the answers have to be supported by “collateral pieces”, the most significant of which is what we refer to as the offering memorandum or the “book on the business.”
The offering memorandum – sometimes referred to as a confidential offering memorandum – is a 20-40 page detailed information package describing all aspects of the business – and I mean ALL ASPECTS; the company’s products, services, employees, history, contracts, growth, performance, competitive advantages and every other tidbit of information, large and small, that will enable a potential buyer to come to a decision – albeit qualified – as to whether the business is right for them.
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Drafting the memorandum involves the collection and organization of a significant amount of data, and the availability of that data largely determines how long the process takes. The end result is meant to answer every question a buyer might have about the business.
The ultimate objective of the offering memorandum is to reduce the due diligence to an exercise of confirming what the seller and broker have disclosed both in conversation and in the offering memorandum. We don’t want to leave anything for the buyer to “discover”. We want the buyer to feel only the need to verify.
But how can we provide all this information and yet maintain confidentiality? Well, we can’t.
Therefore, we have to develop preliminary marketing tools (“collateral pieces”), address non-disclosure issues, vet the buyer and confirm that the potential buyer is financially capable of completing the acquisition.
All of this takes time. For phases 1 and 2 , we budget four to six weeks. And that’s before you can even start marketing!
Phase 3: Contract Negotiations
A properly-priced business in an desirable location should attract qualified buyers fairly easily. But maybe not. There’s no way of telling how long it will be before the right buyer shows up. And it’s not until then that the negotiations start.
If the data gathering described in Phase 1, above, was complete and done expeditiously; and if the valuation went smoothly and the seller and broker were able to agree on a target price; and if the offering memorandum and other collateral pieces are thorough and transparent, the dance required to be performed with any potential buyer should be a relatively short one. We’ve found that serious buyers know pretty quickly whether the business we’re marketing is the right fit for them. If it is – and if it’s priced to reflect value – we’ve found that the negotiations generally revolve around deal terms; due diligence period, closing date, payment terms, post-closing transition period, the terms of any earn-out and the like.
Unless there is a point that one party refuses to budge on, such negotiations can realistically be completed – pending due diligence! – in about 30 days
Phase 4: Due Diligence
This is where the attention to the preparation of the offering memorandum can have a real impact on the speed with which a deal can get done.
If the “detailed description” of the business is handwritten on two sheets of a yellow pad, you’re in for a long, tedious and generally unpleasant due diligence experience – if the potential buyer even sticks around to conduct due diligence at all!
Serious buyers value their time. If they get handed a couple of sheets of paper, handwritten by the seller or, worse, the broker, they’ll be out the door quicker than you can say, “But wait!! It’s such a great deal!”
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On the other hand, if the offering memorandum is comprehensive, easy to understand, laden with supporting documents and built to eliminate surprises, a seller will have little apprehension about the buyer’s due diligence. And if the seller and broker are available to answer any questions, due diligence should , depending on the complexity of the business being sold, be able to be completed in about 30 days.
And a time limit should be put on the due diligence period. There must be an end date established in either the letter of intent or the agreement (in principle) to purchase the business.
But the seller and broker must be prepared for negotiations to be reopened during due diligence. It will be the rare instance, indeed, when a buyer doesn’t find something to warrant additional discussion of terms.
Phase 5: Financing and Closing
If the potential buyer was properly vetted, there should be little concern about the buyer’s financial ability to acquire the business. If the business has been pre-approved by a lender or loan guarantor (for example, in the U.S., the Small Business Administration), acquisition funding should be a relatively innocuous matter.
But remember that somewhere north of 80% of small business acquisitions involve some level of owner financing. In fact, the SBA requires the seller to carry some of the paper on most deals it guarantees.
An experienced business broker or M&A advisor will have a number of lenders with which they’ve worked and will have referred the buyer to one or more of them during the due diligence period.
How smoothly the closing unfolds will depend, to a great extent, on the level of legal talent chosen by the parties. Some attorneys, especially those in general practice with little experience with the sale or acquisition of million dollar businesses, have a reputation as deal-killers. If your attorney handles real estate closings, divorces, speeding tickets, the drafting of wills and other relatively mundane legal matters, there’s no telling what speed bumps will be encountered during the process.
I don’t mean to denigrate attorneys here but to point out that the right one needs to be chosen to increase the odds of a smooth closing. Make sure a transaction attorney is a member of the team – and find out how many transactions as well as their size and complexity they’ve handled.
The Bottom Line
The time required to sell a business depends on many aspects of that business – as well as on the economic and regulatory environments in which it operates. The availability of capital, access to potential buyers, the company’s industry all play a role.
For instance, as I write this, the demand for information technology, health care, construction-related, security and systems monitoring businesses is high. Such companies tend to sell faster than those in some other industries
A business’ location also determines the level of buyer interest and the speed with which it sells. If a company is located in an area with a high livability rating and a talent pool that makes hiring and retaining employees easier, it will likely be more attractive to prospective buyers.
But the characteristic that will have the biggest impact on how long it will take to sell a business is the price being asked by the seller. Which brings me back to my earlier mention of the first two businesses I listed roughly 20 years ago.
The first business I listed sold in four months; the second in 16 months. Both businesses were in the same general area, there were plenty of buyers for both types of businesses and, though in very different industries, both were growing and desirable. The most significant difference? Price to value.
The sellers of the first business agreed to our valuation; listed and closed in four months.
The sellers of the second said they needed more than what we believed the business to be worth. It took 12 months for them to realize that their business was over-priced and, unless the priced was reduced, it would never sell. The price was reduced to something close to what we suggested and – BOOM! – closed 90 days later.
The difference? Properly-priced.
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.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at jo*@Wo*******************.com