Selling a Specialty Business
Selling a Specialty Business may seem like an odd title for a post. Why? Because most businesses could be considered “specialty businesses”. After all, if your business is a supplier of dental tools, a custom guitar manufacturer, a maker of high-fat ice cream, a business brokerage, a specialty cheese maker or any other of dozens of business channels, you probably consider whatever you do to be your “specialty”. And rightly so! We do!
As an example, here at Worldwide Business Brokers we sell businesses. Though we are asked about it all the time, we do not sell real estate (unless it is an asset that belongs to a business we’re selling). We do not sell fixtures and equipment (unless they are part of the businesses we are selling). We do not sell inventory (again, unless it is the inventory of the business we’re selling). We sell operating businesses. That is our specialty which, I suppose, makes ours a “specialty business”.
The impetus for this post was a story I read recently about a couple in United States who have just closed their business – a specialty cheese manufacturer – after nearly 40 years of building the company they started from scratch. If you’ve been reading these posts, you will probably be asking, why did they close it rather than sell it? An excellent question, especially given this discussion. But the couple – John and Penny – appear to have made several mistakes that brought them to this juncture. In this post, I’m going to discuss some of them.
Selling a business takes planning; lots of it and long in advance of starting the selling process. One of the most important aspects to consider when planning to sell is how to be sure your business can reach it highest value and that requires being aware of what drives a business’ value. We generally counsel our sell-side clients to start planning and making any necessary changes at least three years before bringing the business to market. Many people are like the couple in Maine insofar as the planning they did was essentially determining when they wanted to phase out of the business. But they forgot about getting the business ready to sell, marketing it, valuing it or even considering the time that might be required to find a buyer.
They closed the business a couple of months ago and, needless to say, no longer have one to sell. What they now have is equipment to start a cheese-making business and recipes for some good cheeses. They have listed “it” on FarmLink, Maine Farmland Trust’s program to match potential farmers with farms, with a price tag of $100,000, which includes the equipment, the recipes and “mentorship”, which I presume is a euphemism for training. But they are now trying to sell a closed business, something that loses value quicker than an day-old bagel. In many such cases, the value ends up being what the equipment will bring at auction.
Here is what they should – and should not – have done.
Four Critical Considerations
Consult with Advisors
If you are having chest pains, you will likely consult with someone that knows something about chest pains and how to remedy them. If you are selling your house, you will likely consult with someone that knows something about selling houses. Selling a business is no different.
There are a number of advisors that business owners should call upon when getting ready to sell their business, most notably a professional business broker. Though it is not completely clear from the story, there is no mention of the couple having consulted with a business broker. Selling businesses – and, as importantly, advising on the sale of businesses – is what business brokers do. We have expertise in valuing, positioning and marketing businesses – as well as in negotiating for the best price, finding the financing the buyer will need and generally shepherding the transaction to the closing table. Business brokers that have been in business for a while will have an existing database of buyers. Most professional business brokers co-broke; that is, they will work with dozens if not hundreds of other business brokers immediately multiplying the chances of finding a buyer substantially. (We work with more than 500!)
In addition to an experienced, professional business broker, an attorney that specializes in business transfers will be invaluable when it comes time to review the documents offered by the buyer as well as the final documents prior to closing. As well, an accountant that can advise on the tax implications of the various ways available to you to get your money out.
Find and use professionals experienced in business transfers. They’ll be worth much more than they’ll cost.
Is it Priced Right?
Absent the right advisors – in this case, a professional business broker particularly – how can you determine the value of the business? Few business owners can do the research necessary to correctly determine what their business’ value is. And remember: the value you need to be aware of is the market value, not the value to you.
Market value and the value to you – value versus price – are two different things. Our brokers get calls all the time from business owners that are ready to sell and say “…and I want $XX for it.” What a seller wants for its business and what that business is worth are usually two completely different numbers. A business must possess, at minimum, three essential financial conditions for a buyer to seriously consider acquiring it: enough income to support the buyer’s family, a return on the cash the buyer invests to buy the business and the ability to pay for itself; that is, to pay off the financing the buyer used to acquire it. (Check out this article for details on this.)
Succession: The Next Generation
Our cheese makers have a couple of kids and, like the kids of most business owners, these kids worked in the business when they got old enough to do something meaningful. Like many business owners, the parents envisioned their kids taking over the family business some day. But it is very unusual for the next generation to have much interest in a business they had to work at while in school; especially if this work requirement kept them from spending time with their friends or otherwise doing fun kid stuff on weekends, after school and on school breaks. On top of that, people – a term that sometimes even includes kids – generally develop individually and have individual interests. It is rare that the interest of the children will align with that of the parents. The kids want to get out, spread their wings, explore other interests. While it does happen, it is quite uncommon for the next generation to take over. Our cheese makers seem to have planned for the kids to come on board. The kids had other plans.
Have you considered the financing?
Have you lined up a couple of lenders that you can steer the buyer to? Your buyer is going to need some options in this regard.
If you have a specialty business, you would be wise to consult with a couple of lenders, especially your own banker, to find one or two that would consider providing the financing to a qualified buyer. Granted, the buyer may already have a special relationship with a lender or may have enough horsepower to walk into any lender and get the necessary financing but it has been our experience that a seller that has already lined up a couple of financing options for a qualified buyer will see the transaction close much more quickly and smoothly.
Not surprisingly, a professional business broker can help you with this. Business brokers have to get every deal they do financed. As a result, they generally have all sorts of sources to turn to. Here’s an article on this very topic. And, if your business is in the United States, here’s a podcast interview of a principal of a preferred SBA (Small Business Administration) lender. Both might be worth reviewing.
What Do You Really Need?
The most important thing is planning – and doing so before it’s time to sell. You need time to get your business ready to sell and every business can be spruced up a bit; some can be spruced up a lot! I was interviewed a couple of years ago about how to get a business ready to sell. Because this is such a broad topic, the interview turned into two parts. You can listen to Part 1 and Part 2 as you have the time but do so before you’re ready to sell. Some of the tips will require some time to implement and show results.
Probably the most pressing question we get when first speaking with our sell-side clients is about value. Sellers usually want to know what their business is worth. While we do business valuations all the time, if you’d like to see a list of what a business broker needs to perform a valuation, we created such a list for our business broker subscribers – and for anyone that wants to become a business broker. You can download it for FREE by filling in and sending this form to me.
The list will be delivered to your email box immediately.
If you’re thinking of selling your business – even if it is a specialty cheese business – let me hear from you. What are your concerns? What is your timing? What are you unsure about? And arguably most important, what are your plans for after the sale? I’d love to chat with you about any of these issues. Send me an email (below).
Having something to transition into is extremely important. I know; read this post and you’ll see how I know. I’d be happy to share with you what I learned from that experience. We train our brokers how to address this issue with sellers because it will likely have the longest impact on your life after the sale.
If you have any questions, comments or feedback, I want to hear from you. Put them in the Comments box below. 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 profitable week!
The author holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at joe@WorldwideBusinessBlog.com