How do you really sell your business?
This is a fascinating question as you think the answer would be very simple. What does it take to really sell your business?
The answer is that it is anything but simple to sell a business. And here are several reasons.
Selling your business comes with complications
The consensus would be that the price of the business is the most important item. But that’s not always true.
Recently I put a business on the market that the owner had started 33 or so years ago and it was time, in his mid-sixties to find a buyer and therefore new owner of his business. The seller has about 15 employees. He doesn’t want to close the business and throw everything into the dumpster.
His last full year of operation saw him finish the year with Sellers Discretionary Earnings of just over $900,000. Any small business owner would consider that a successful year.
You would even think the business was easy to sell as the business was on the market for a total sale price of $300,000. Yes. You read that correct. A typical business valuation would have this business worth well over $1,000,000.
In this case, the price was not enough to see the business sold.
Some challenges in selling this business
There were several challenges to try and sell this business. Here are a few of them.
The buyer needs a contractors license
The first challenge was the business owner or buyer would need a General Contractors License with the Contractors State License Board of California. This is typically a license that takes a minimum of 4 years to obtain as it requires an education component and experience in the construction industry. There are ways to make this shorter than 4 years but it’s not something you can achieve in a week or two.
An employee may obtain the contractor’s license but that’s not a good business decision for the buyer and new owner of the business. If the employee makes salary, ownership equity or any other demand and the buyer doesn’t have the contractors license, they have no choice to agree to those demands or the business shuts down and the buyer loses his investment.
A buyer wants to understand the current business performance
The second challenge is that a business doesn’t sell quickly, and the buyer can take their time to research and feel comfortable with the operation of the business before they make an offer.
A buyer wants to understand the monthly peaks and troughs of the business and the current and previous customers level of satisfaction.
This also includes the current employees’ satisfaction and their willingness to stay and work for a new owner. A buyer is making an investment and wants to ensure their investment is made with proper care and consideration.
The buyer needs a new lease
The third challenge was that the owner of the business had sold the building the business was operating from. This was a good business decision for the seller, but it now meant any buyer had to negotiate a new lease with the new owner of the building.
The new owner of the building was very reasonable and willing to negotiate but this all takes time and attention to detail.
How were sales performing?
The fourth challenge was that the seller of the business had been very successful in the previous calendar year but began losing motivation as the end of the year was approaching and this was continuing when the business came onto the market.
The result was the pipeline of new sales was lower than normal and this created a pause for potential buyers as it meant the pipeline was going to have to be rebuilt.
As is typical in every transaction there were other items to consider. These include whether the transaction is an asset or stock sale, and:
- Who completes the existing contracts?
- Is financing necessary and if so, readily available?
- What taxes affect the seller and what taxes affect the buyer?
- What technology is the business using?
- What accounting software does the business use?
- Are there any legal matters pending?
There are m,any more questions that a buyer will often ask, and things they want to consider.
How motivated is the buyer to buy the business?
There is one important item still missing and it’s probably the most important.
How is the buyer feeling or more importantly, how is the buyer and their family and friends feeling?
Almost without exception, a buyer will not buy a business in a vacuum. They will talk to their loved ones and friends to make sure they are making a good decision and are not making a mistake. It’s amazing how many buyers drop out of the process to buy a business because a loved one or friend thinks this is the wrong way to go.
How do you really sell your business?
The answer to this question is simple. It was captured in what is referred to as IRS ruling 59-60.
In part, IRS ruling 59-60 says that the Fair Market Value for a privately held business is:
“The amount at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
Where to start if you are ready to sell your business?
If you are ready to sell your business, the first major step to take is to get a business valuation.
A proper business valuation from a qualified appraiser should include “having a reasonable knowledge of relevant facts.” Bear in mind that these facts change and can change quickly.
The business valuation will include an analysis of financial statements. The analysis should be written and presented so it’s clear to a buyer and potential SBA lender the performance of the business and its cash flow.
If you would like more information, check out this page: Business valuation.