Lessons from selling businesses
What’s your experience from selling a business?
Oliver Wendell Holmes, Sr. was a physician, poet, professor, lecturer and author that lived in 19th century Boston, MA. One of his famous quotes is “A moment’s insight is sometimes worth a life’s experience.”
Here are some of the lessons I’ve gained from my experience from selling businesses to hopefully make yours a smooth experience. Most business owners will not do this very often and as result, can easily miss-step. My goal is to maximize your chances of success.
Here are 10 items to consider from my experience of selling businesses:
1. It takes time to sell a business
Life is busy and hectic with so much to do yet so little time. This seems even more so for business owners as there are multiple things to be done and done properly or there is a danger the very thing to protect, the business, will wither and die.
If life is hectic and you own a business, how do you expect to find the time to package and present your business for sale, learn and understand all the steps and in the process of finding a new owner, get it all right?
When you start to think that it is time to sell your business you are right. Sometimes the final step of closing the sale of a business can take years as it requires getting the proper accounting in place, written processes and procedures, understanding finance options, tax responsibilities and more.
If you plan to sell your business it will take more time and require more of your time than you expect as there are too many things you simply do not control. Once you decide to sell, put time on your side so you do as much as you can on your terms.
2. Quality financial statements matter
Put yourself in the shoes of the buyer.
You make initial inquiries about buying a business for sale. Your initial interest is to look at the Profit and Loss, Tax Returns and Balance Sheet to make sure the business is making as much as the broker or seller says it does. The only reference point at this stage for the buyer is a set of financial statements. If the Profit and Loss doesn’t add up or the Balance Sheet does not make sense, for most buyers it doesn’t make sense to continue to spend their time as what they are seeing makes them uncomfortable.
The appearance of the sellers financial records, files and reports are a big deal and must pass the first test for a buyer to keep going.
3. Appearances matter
Questions from the buyer will flow from the financial statements. The quality of responses and the requests for supporting documents and how it’s presented is a big deal. If so far is so good, the next step is a conference call for the buyer to ask initial questions so they get a feel for the honesty and integrity of the seller and if they think they can work with them. If what they are seeing is making sense then the buyer will keep going. If it isn’t, they’ll cut their losses and move on.
At this point in the transaction, all a buyer has guiding their next steps is appearances. That is, appearances matter.
4. What are you selling?
Not every buyer can qualify to buy any business. If your business has a license then this is the first thing to disclose to potential buyers. If you are selling a medical practice in California, the buyer must hold a current California Medical license or they cannot own and operate the practice.
Similarly, a business may have a California Contractors license such as a General Contractors License and/or a special license such as plumbing or electrical etc.
Another example is an ABC license to sell alcohol. If the buyer has a record from drinking and driving they will not qualify to get an ABC liquor license no matter how hard they try.
In addition to license disclosures, disclose any other information that may filter out potential buyers as it’s better to do it early than try to do it later. Examples include but are not limited to if the business has union or non-union employees, if all employees have signed an I9 immigration form, if the business has a Profit Sharing plan, health insurance for the owners and employees and any pending litigation. Buyers do not like surprises when buying a business.
5. All transactions die three times
Selling a business or buying a business comes with many steps and processes. Emotions run high for a prolonged period of time, especially if there are delays.
As a broker that specializes in the buying and selling of a business, it is not unusual for the transaction to die up to three times. At the end of the day, the business is sold by the owner and it’s bought by the buyer because all details have been disclosed and there is a motivated seller and a motivated buyer. If one party is not motivated enough the deal doesn’t close. It’s as simple as that.
It’s also very normal for melt downs, frustrations and temper tantrums to occur as its part of the territory of buying and selling a business.
6. Understand the ebb and flow of a deal
There is a pattern that happens in almost all deals. In the initial stages, the seller is the most important player in the deal as they get to decide what and how much they disclose to a potential buyer. If the seller feels the buyer doesn’t have the right traits they can choose to delay or make comments to discourage the buyer.
Once the buyer makes a formal offer and the seller decides to accept it, the focus and impetus now moves to the buyer for a number of reasons. This includes the buyer conducting their due diligence to make sure they are happy with the representations of the seller. If the buyer needs to obtain third party finance, that can be a slow and difficult process. Is the buyer focus just on this transaction or do they have others in play? Will the buyer be able to qualify to take over the lease, how much training does the buyer need and more.
Once all the deal points are done and escrow is nearing closure, both buyer and seller need to come together so the goodwill the seller enjoys passes to the buyer.
7. A buyer does not have to buy
The sale of a business generally starts with the owner or seller deciding it’s time to do something different. The buyer however has to do most of the heavy lifting to get it all done. This includes negotiating the deal points, putting these deal points into a purchase agreement, making sure the financial statements reflect the representations of the seller, they are correct and up to date and more. At the end of the day, though, most buyers if they close the sale want to buy but they are generally under no obligation to do so.
For a seller with multiple offers, choose the option that makes the most sense and stay focused on it. Trying to negotiate with multiple buyers simply creates too much as the ebb and flow of a deal is in constant motion.
8. Get Advice from Experts to Sell Your Business
There are a range of experts that can help a seller through the process of selling their business. Most business owners have not sold or have only sold one business before. It makes perfect sense for them to get legal advice from a qualified attorney, accounting and tax advice from a CPA or Enrolled Agent and how to invest the proceeds of the sale and appropriate life and other types of insurance from a financial planner.
Of course, I see my role as a business broker as critical in helping both the seller and the buyer by being the primary professional in the transaction putting valuations together, reviewing, collecting and disclosing documents at the appropriate time, handling the marketing of the practice to attract as many buyers as possible and when they inquire, having the right documents in place ready to go. In my own case, two other services I other include a valuation of the business with an 18 page written report and having a broad range of third party lenders who will look at providing finance to a qualified buyer. Plus, don’t forget my primary benefit which is being a sounding board for both buyer and seller to ensure any and all of their questions are answered as a deal will not close while any question remains outstanding on either the buyer or sellers side.
9. Manage your Experts
Getting help from trusted advisors is good business. Professionals that know you and what you do allow for good ideas and the right information to be shared quickly and easily. However, make sure you control these experts and make sure they are the right expert for the right question. A seller I was working with recently had a tax question for his CPA. The tax question turned into a written report and a bill to the seller for $2,000 which is not what they were expecting.
Not all attorney’s specialize in the buying and selling of a business. If an attorney is inexperienced they can kill the deal as they may be too worried about giving wrong advice or being held responsible for the decision of the seller and so it makes more sense to them to kill the deal and therefore keep their client.
10. Life happens
Selling a business comes with many moving parts. A lot are predictable but also many are not. Health issues, financial issues, business and personal time pressures and just the demands of staying on top of it all. So much is easily disrupted as life happens and it is what it is.
Are you thinking about selling your business?
Would you like to know the value of your business?
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.