Selling a Business: What Buyers Want
9 January 2023: Selling a Business: What Buyers Want
Selling a business becomes a little easier if you start with the question, “What do buyers want”?
But when we ask that question, we’re not referring to a specific industry, business size, location, net income or any other specific category or metric. After all, not all buyers want convenience stores or testing services or real estate companies or any of the thousands of other businesses in hundreds of other industries and categories.
But all business buyers, regardless of the type of business they’re looking for, want similar things from the seller, the broker and, ultimately, from the business.
First, Understand Something
Arguably the most elemental aspect of understanding the buyer is that, for most, buying a business is to them a life-changing event that entails, in their mind, significant risk. In almost every case, they have never bought a business before. It is highly unlikely that they’ve ever contemplated an investment of the scope and size that buying a business entails, nor the risk – financial and operational – that buyng a business will require them to take on.
If they’re married with a family, these risks, at least as the buyer perceives them, are magnified manyfold. Try to imagine the spousal/partner discussions after dinner of removing a quarter-million dollars from the family retirement account and going onto debt for another three-quarters of million dollars to acquire a million dollar business.
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We – professional business brokers and our clients, the sellers – need to start by asking a pretty simple question: “If I were a potential buyer of this business, what would make it so attractive and hard to pass up that I would willingly risk my hard-earned money and even go into debt that could cripple my family to buy it?”
If you’re the seller – or the broker – you want to make it as easy as possible for the buyer to buy. To do so, let’s modify the question slightly.
What Does The Buyer Need?
The buyer needs to get comfortable early on with the seller, the broker and the information the buyer is receiving. We need to focus on establishing trust in the buyer’s mind that will gradually reduce the buyer’s natural suspicion that everything isn’t necessarily what it seems. This requires some effort on the part of the broker.
Experienced brokers can usually get a sense of whether they’re getting the whole story from the seller pretty early on. The thoroughness and clarity of the information the seller provides for the valuation is one indication. The seller’s reaction to the broker’s valuation calculations is another. Of course sellers that try to sell their business without the guidance of a professional business broker – or worse, by using a real estate agent – generally doom the effort from the start as no one involved is likely to have even the most remote idea of how to value a business.
If you asked them, many buyers would struggle to name the often intangible elements or characteristics of a business sale that they need. Sure, the answer to the question, “How much will this business put in my pocket?” is one of them. But there are plenty of other less-obvious aspects that can engender trust and make the process more pleasant – and less likely to fail.
Here are some things to consider when thinking about buyers prior to bringing a business to market
Transparency. “Transparency” is a word currently in vogue but often honored more in the breach than in the observance. It is critical in the establishment of trust. An intelligent buyer will want to know everything about the business – the good, the bad and the extremely unpleasant.
Owner dependence: Does the business’ continued success depend on the current owner? If so, a buyer’s odds of failure become exponentially higher once the seller leaves. Smart buyers will realize this and the business will either sell at a significant discount or the seller risks the buyer defaulting on the note that undergirds the seller’s financing. (See Shared Risk, below.)
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Strategic plan: Is the business being run according to a strategic plan that everyone – even the owner – follows or is the owner running it by the seat of his pants, changing direction, reversing decisions and second guessing the managers seemingly at random? Buyers need to see that a direction has been plotted and is being followed.
Organizational Clarity. Thorough, organized and easily comprehended books, records, contracts, etc. Are all this documentation in its proper place, easy to find and easy to grasp?
Justification of value. This is a big one. In more than 20 years advising sellers and valuing and marketing businesses, when we ask a seller or a real estate agent who has listed a business for sale how the price was arrived at, we’ve NEVER gotten a sensible answer. The price has NEVER been justified. It’s always been some variation of “That’s what the seller wants“. If you can’t show a buyer why the business is worth what your asking for it, the likelihood of a sale is reduced dramatically and any ultimate sale is likely to be to a buyer ill-equipped to run the business successfully.
Shared risk. Realizing that in something more than 80% of small business sales, financing includes some amount of seller participation, if the business can’t provide the three critical “musts” to the buyer, the seller will never collect the entire amount the transaction was expected to generate and, worse, will probably end up having to take the business back. And in such an instance, the business is likely to be in a condition much worse than when it was sold.
The Bottom Line
Different buyers want different businesses. But ALL buyers want to be able to trust the seller and the business broker. That trust is built on several foundational blocks including the seller’s/broker’s ability to justify the price asked for the business.
But all of the points listed above are part of the foundation of trust.
If you ask any buyer what they want, you’re unlikely to hear any of these points mentioned. But we can tell you from experience that if your philosophy – as a business owner selling, or a business broker representing a seller – adheres to these principals, the business you’re trying to sell is much more likely to find a qualified buyer. And, with a realistic value, you’re less likely to be disappointed with the results.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at joe@WorldwideBusinessBlog.com.
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.
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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 500 in the world. He can be reached at joe@WorldwideBusinessBlog.com