How to Sell Your Business?
As they say, failure is a great teacher.
However, if you want to sell your business, why not learn from other owners who have sold their businesses?
One of the byproducts for a business owner looking to sell their business is the lessons they can learn from those negotiations. To help a business owner looking to sell their company, they can do two valuable things: work with an experienced business broker and take advantage of peers who have tried and failed, or—better yet—have successfully sold their business.
Grow the Size of Your Business
Online Services is currently the exception rather than the rule in business valuation when selling. You shouldn’t have unrealistic expectations and don’t expect your business value from a Buyer to be much above the normal EBITDA. Multiple ranges are customary for businesses of a similar size to yours. However, research shows that as the size of your business grows, its perceived value to purchasers will increase. For example, achieving a $5 million valuation for a business will significantly contribute to meeting that goal. The IBBA survey indicates that there were no buyers requesting Seller financing when the company’s purchase price exceeded $5 million. However, for businesses with purchase prices ranging from $500,000 to $1 million, approximately 20% of the buyers required the Seller to accept partial payment in the form of a Seller’s Note Receivable.
Business sales with purchase prices from $5 million to $50 million continue to have many earnouts. Adding an earn-out agreement, a type of contingency payment, into the contract terms may occur because the Buyer and Seller need to bridge the valuation gap. The Buyer pays the Seller when specific predefined post-closing events (performance targets) are achieved. This can be especially helpful when the business is growing quickly.
Most Acquisitions are by First Time Business Buyers
Interestingly, the IBBA survey revealed that first-time buyers and serial entrepreneurs led all other types of business buyers during Q2 2023 for businesses with valuations under $1 million and those with valuations between $2 million and $5 million. Strategic buyers comprised the majority of companies valued between $1 million and $2 million, and 50% of all businesses valued between $5 million and $50 million were acquired by private equity firms. The rest of the purchase price range consists of strategic buyers and existing business owners seeking new business opportunities.
The survey results emphasize that first-time buyers may not possess the business savvy, financial education, or relevant business experience to consider the myriad of details and pitfalls in the purchase process, due diligence, and negotiations. An experienced business broker will advise a prospective business purchaser of the nuances and caveats of private business financial reporting. With this in mind, a Seller should have a veteran broker to support their side of the deal. A knowledgeable business advisor can eliminate uncertainty and anxiety for a business Seller. Think of it as going to court and representing yourself when the opposition hires a big gun from the most prestigious law firm. Level the playing field and partner with a business broker to streamline the entire process, prepare the business for a favorable sale outcome, and increase the chances of closing the deal.
Seller Mistakes That Blew the Deal
Here’s an incredible statistic: 78% of deals with a value of less than $500,000 were terminated without closing during Q2 2023. The IBBA survey compiled a list of sellers’ biggest mistakes that hurt their chances of completing the sale.
Those mistakes include the following:
- Unrealistic Seller Expectations;
- Poor Financial Recordkeeping;
- Slow Business Sales;
- Delaying Too Long in Selling; and
- The Seller’s emotional ties to the business prevent them from being able to let go and close the sale.
Learning from other business owners means receiving advice on the actual fair market value of the business immediately and considering the time and effort required to promote the business for sale and close the deal. Business owners can significantly reduce this time and effort by engaging an experienced business broker, who will assist in organizing financial records and securing a third-party valuation of the business. This will significantly improve the likelihood of closing the sale of your business without compromising how you share key documents when selling it.
Selling Your Business with Property
There is simply no “one size fits all” approach to selling a business with property. If you own a California business and the real estate on which the company operates, offering a lease to the Buyer is the simplest option. The following are essential factors to consider.
- How critical is real estate to the operation of the business? If the company owns a gas station or car wash built on its real estate, it will be challenging to sell just the business and offer a lease to a Buyer. This is because the company is not easily relocated.
- Is the real estate just land, or does it include buildings or structures? If it includes buildings or structures, are they in good condition, or do they need repairs and maintenance? If repairs and maintenance are required, is the Seller willing to pay those costs so the buildings and structures are up to date? This includes complying with the latest building code.
- The Buyer will probably want a lease for the Real Estate. Be cautious if the Buyer requests a three— to five-year lease with options. If the Buyer only stays for the initial lease and then leaves, would the Real Estate owner easily find a replacement tenant? Note: If the Buyer is obtaining an SBA loan, the lender will require a lease that matches the loan’s term. Most loans are typically repaid over 1 to 0 years.
- Has the business owner or Seller been allocating an amount for rent? Is this amount a market rate or the amount the owner of the Real Estate is willing to accept as rent? If there is no rent allocation or the rent is below the market rate, and the Buyer has to pay a higher rent, the value of the business will be lower, as expenses are higher. This also applies if the business owner has not been paying property taxes, building insurance, or maintaining the Real Estate and now expects the business and real estate Buyer to cover these costs.
Prepare to answer these questions.
- Are there any environmental issues in or near the actual state? If so, this may lower the value of the Real Estate and the business.
- When was the last time that local zoning ordinances were checked so that if real estate is put on the market, it is ‘smooth sailing’ to close the sale
- Local use requirements are typically a decision at the municipality level and relate to local zoning ordinances. Are they being checked?
- Is the Real Estate part of a flood zone?
Sample reports
The following sample report may be of interest to you. If it helps, open each link below and download the report.
- Sample California Commercial Real Estate report with basic property overview, environment, building, value, and more.
- Sample report of California Commercial Real Estate with climate check including flood, fire, storm, heat, etc.
- California Commercial Real Estate property sample report, including environmental information, regulatory summary, and neighborhood details.
- Sample report of California Commercial Real Estate flood certificate.
- Sample California Commercial Real Estate report with property condition report, site summary, building summary, hazard risks, and more.
- California Commercial Real Estate Sample Report of Estimated Value.
How to Sell a Commercial Property Fast with a Business in California?
Are you looking to sell your commercial property and business in California?
A crucial first step is to get an accurate business valuation.
This is important not only for you, the Seller, but also for potential buyers. If the Buyer needs financing, it is equally crucial to third-party lenders.
FOR MORE INFORMATION, CLICK EACH LINK BELOW
Other Commercial Real Estate topics to consider.
Commercial Real Estate Valuation
Commercial Real Estate Due Diligence