Increase chances of selling your business
On December 26, 2013 I had an article written by Ed Goldman published in the print edition of the Sacramento Business Journal. The headline was called “Complexity is killing off small businesses.” If you are familiar with Ed Goldman he writes one article per day for the Sacramento Business Journal. He likes to cover a range of topics but they have one constant theme and that is they are about small business or small business owners.
The premise of my conversation with Ed was that complexity is killing off small business and that is because there are so many government regulations a small business owner needs to follow at the Federal, State and Local levels. In addition, the tax code is incredibly complex and has so many places for business owners to get caught; simply consider the new laws regarding health care and how often and quickly they are changing at the moment.
Increase chances of selling your business
Just as owning and operating a business is complex, the same applies when the business owner decides to sell. Here’s 8 items a business owner needs to navigate when selling their business. Making one mistake can make the difference between the success of closing the sale or worse still, not only not closing the sale but frustrating others in the transaction to the point they say or do something that has a negative impact on the business.
1. Over estimating the value of the business
Almost without exception, each business owner thinks their business is worth more than it is. The solution to this problem is simple and that is to get a valid appraisal. This is one of the services I offer. It doesn’t take too long but it provides great insight for the seller as I spend time with them, not only doing the valuation but also discussing the selling process and how it works, the strengths and weaknesses of the businesses and what steps to take to protect the business.
2. Selling the business to the right buyer.
Not every buyer that shows an interest in the business is the right buyer. My rule of thumb used to be that it took 10 buyer inquiries to find the right buyer for a business. However, it’s now taking more buyer inquiries to buy a business as buyers have credit score or credit history problems that prevent them qualifying for a loan or preventing the seller from carrying some finance, lack enough cash as a down payment, lack the necessary management or business skills to run the business, unable to qualify to get the license necessary to operate the business or some other reason. If you are selling your business, buyers are reluctant to make these disclosures early in the process but they are necessary to avoid wasting a lot of time trying to help a buyer buy a business they have no way of being able to close.
h2>3. Disclosing too much to the wrong buyer
The value of its business is ability to generate a cash flow to its owner. The cash flow comes from the hard work of the owner managing many tangible or ‘soft’ items such as loyal customers, training and motivating employees, the right advertising at the right time to the right audience, how well and quickly the phone is answered and so much more. Many sellers are motivated to sell their business and so try to “sell” their business…to the wrong buyer. As I mentioned above, not all buyers will be able to qualify or have the final motivation to buy a business. The seller should carefully manage to who and how much they share about their business as a buyer who can’t qualify to buy it and knows a lot about the business can quickly talk and create some damage. At a minimum, do not disclose anything to a buyer until they have signed a Nondisclosure Agreement.
4. Understanding the financial statements are critical documents
The value of a business is based primarily on its cash flow. Hard assets are important items but the cash flow of a profitable business is what allows everything to happen. The cash flow funds the money to pay the owner, employees, rent, utilities, loans to service the debt and so much more. The financial statements are the historical record of the cash flow. Too many buyers don’t understand these documents which means they should rely on the help of a professional to advise them. Too many sellers do not have quality financial statements and this will make it hard to sell the business to an educated buyer. It will also prevent a lender approving a loan. If a seller wants to get the maximum price for their business, they also need to report all their cash sales. If all the cash sales are not being reported they are reducing the amount they will get when they sell their business.
5. The price is important but the terms are more important
One of the first questions a buyer wants to know when buying a business is the purchase price. The second question they want to know is how the business or practice arrived at that price and that’s easy to explain if a valuation has been done.
The price of the business is important but what’s much more important is the terms of the deal. Many buyers and sellers spend too much time solely talking about the price, however, all this is mute if they can’t agree if the transaction requires finance, if the buyer wants the seller to agree to a 25 mile covenant not to compete but the seller is only willing to offer 5 miles, the buyer wants 4 weeks of free training and the seller will only provide one, if the buyer wants certain pieces of equipment but the seller says they are not part of the sale.
The best way for both parties to work through the terms and conditions is with a written Letter of Intent that outlines the major deal points or completing a Purchase Agreement that both parties negotiate over. With these documents, written counter offers can be made so all parties are clear and there are no misunderstandings.
6. Forgetting to plan what to do after the business is sold
One of the first questions I ask a seller is what they will do once they sell their business. The answer to this question helps me understand if the seller has truly worked through what they are going to do once the business sells as my biggest concern is to take the business to market and do all the work to find the perfect buyer and then find the seller decides they really don’t want to sell as they are not sure what they are going to do once they no longer own the business.
If you are a buyer that has come across the perfect business you’d like to buy, make sure the seller gives you a good reason why they are selling and what they plan to do after the transaction closes escrow.
7. Misunderstanding the buyers motivation
As I write this article I’m dealing with a seller that wants to sell his business and thinks he has a clear picture of what he’s selling and is being presented to the buyer. Unfortunately he’s not even close. The seller sees the hard assets as the items the seller is offering but that’s not what the buyer sees. The buyer is looking at the intangible assets such as reputation, brand, the intellectual property and management skills of the employees to continue running the business. A critical component for a buyer is seeing themselves own and operate the business and what changes they would like to make so it performs better. Because the seller is looking to get out, they don’t see the need for a new coat of paint or to upgrade some pieces of equipment or how better the business would perform with a new service or website etc.
As a broker in a transaction this is one of the pieces I enjoy the most as it allows for some creativity and excitement to uncover new opportunities and potential of the business.
8. Failing to get help from professionals
At least once a week I get calls from sellers, buyers, lenders, attorneys or accountants that are in a transaction and would like some advice about how to navigate through an issue. A lot of times the issue has become an impasse because either the buyer or seller or both are so fixed on their position and it’s about to stop the deal. What is intriguing is that the parties may be locked over an issue but often it’s because of poor communication or two or three issues that have become entangled into one. I’ve also seen deals almost die because the buyer saw a $2,000 piece of equipment one day when they were at the business and they will not close escrow until its part of the sale; and the seller refuses. So both parties are locked in a stalemate as the seller won’t budge and neither will the buyer.
Third party professionals are often critical to the success of closing a transaction. The professionals don’t carry the same amount of emotion as the buyer and seller plus they have an expertise that when presented correctly, can diffuse a difficult situation.
This may be too simplistic but I think it’s almost impossible for a seller and buyer to close a transaction on their own as there are way too many moving parts including the emotional ups and downs that are part of doing a deal.
Are you thinking about selling your business and move to your next challenge? Would you like to know the value of your business? If you would like more information please visit my webpage Business valuation. If you would like more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.