Lessons You Can Learn from Other Owners when Selling Your Business
As they say, failure is a great teacher. However, if you are looking to sell your business, why not learn from other owners when selling your business?
One the byproducts of the experiences of other business owners who have attempted to complete the sale of their business and run into difficulties, is the lessons that others can glean from those negotiations. A wise business owner who is looking to sell his or her company in 2016 can do two valuable things: work with an experienced business broker and take advantage of the opportunity to learn from peers who have tried and failed or—better yet—have sold their business successfully in the recent past.
The International Business Broker Association (IBBA) and M&A Source, along with Pepperdine University did a survey of survey of 250 respondents concerning businesses marketed and sold in the U.S. The survey research looked at businesses listed for sale and sold during the second quarter of 2014 with a value up to $2 million and those with a value between $2 million and $50 million.
Grow the Size of Your Business
Online Services is the currently the exception rather than the rule in business valuation when selling. You shouldn’t have unrealistic expectations and don’t expect your business to be valued by a buyer much above the normal EBITDA Multiple ranges that are customary to businesses similar in size to yours. Research does, however, show 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 towards achieving that goal. The IBBA survey showed that there weren’t any buyers asking for seller financing when the purchase price of the company was more than $5 million. However, 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 a large number of earn outs. Adding an earn out agreement, which is a type of a contingency payment, into the contract terms may occur because the buyer and seller need to bridge the valuation gap. It’s paid by the buyer to 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
It’s interesting to note that the IBBA survey showed that first-time buyers lead all other types of business buyers during the Q2 of 2014 for businesses under $1 million and those from $2 million to $5 million in valuation. Strategic buyers made up the majority 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 in that purchase price range consisted evenly of strategic buyers and existing business owners who were looking for additional new business opportunities.
The survey results emphasize the notion that first time business buyers may not possess the business savvy and financial education, in addition to 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 all of the nuances and caveats of private business financial reporting. With this in mind, a seller should also have a veteran broker to support his or her side of the deal. A knowledgeable business advisor can eliminate much of the uncertainty and anxiety for a business seller. Think of it like going to court and representing yourself, when the opposition has hired a big gun from the most prestigious law firm in town. Level the playing field and partner with a business broker to streamline the entire process and best 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 the deals valued at less than $500,000 terminated without closing during 2014 Q2. The IBBA survey compiled a list of the biggest mistakes sellers made that hurt their chances of successfully completing the sale.
Those mistakes included 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 Causing Him/Her Not Let Go.
Learning from other business owners means getting advice about the true fair market value of the business right away and considering the amount of time and effort it takes to promote the business for sale and close the deal. Business owners can cut this amount of time and effort significantly by engaging an experienced business broker, who will assist in the organization of financial records and securing a third-party business valuation. This will greatly improve the likelihood of closing the sale of your business.
It’s ok, and actually quite smart, to ask for help, to ask questions, and be as prepared as you can be for the sales process. Your business will sell for much more with experienced help, which Andrew Rogerson is happy to provide. To discuss issues with selling a business in the Sacramento area, please visit our website Services and choose from the drop down menu the information you’d like.
For more immediate help, please send an email to Andrew or call him at (916) 570-2674.