How To Sell Your Business | Lessons Learned From Other Owners

November 22, 2023
Deal Structure

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 when selling your business?

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 sold their business successfully.

The International Business Broker Association (IBBA) and M&A Source conducted the research. The research was conducted with business owners looking to sell their businesses in the U.S. The survey looked at listed companies for sale and sold during the second quarter of 2023 with a value of up to $2 million and those between $2 million and $50 million.

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 to businesses similar in size to yours. However, research shows that if you grow the size of your business, its perceived value by purchasers will increase. For example, growing a business to a $5 million valuation will go a long way toward achieving that goal. The IBBA survey shows that there were not any buyers asking for seller financing when the company’s purchase price was more than $5 million. However, for businesses with purchase prices from $500,000 to $1 million, about 20% of the buyers needed the Seller to accept partial payment in 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 showed that first-time buyers and serial entrepreneurs led all other types of business buyers during the Q2 of 2023 for businesses under $1 million and those from $2 million to $5 million in valuation. Strategic buyers made up most of the sector of businesses 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 evenly of strategic buyers and existing business owners looking for 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’s’s 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’s’s. 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 result in a sale, 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 less than $500,000 were terminated without closing during 2023 Q2. 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 getting advice about the actual fair market value of the business right away and considering the time and effort it takes 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 business valuation. 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 the business operates from, offering a lease to the buyer is the simplest option. The following are essential factors to consider.

How critical is the real estate to the operation of the business? If the business is a gas station or a car wash built on the real estate it operates, it will be hard to sell just the business and offer a lease to a buyer. This is because the business is not easily and readily moved.
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’s 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 careful if the buyer wants 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 getting an SBA loan, the lender will require a lease to match the length of the loan. Most loans are typically repaid over 10 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 the property taxes, building insurance, or maintenance of 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.

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 as the Seller but also for potential buyers. If the buyer needs financing, it is equally crucial to third-party lenders.

Send free inquiry

FOR MORE INFORMATION, CLICK EACH LINK BELOW

Other Commercial Real Estate topics to consider.

Commercial Real Estate Valuation

Commercial Real Estate Due Diligence

Finance, Taxes, and 1031 Exchange

Commercial Real Estate Escrow

How To Sell Your Business | Lessons Learned From Other Owners