How do you sell a business from a position of strength?
The economy continues to recover. Many business owners had been holding off on selling their businesses while the economy was performing poorly and financing was difficult to obtain, as they believed they would not receive the best price for the business.
Part of what I do includes receiving calls from business buyers who find the buying process frustrating. This is because they have the motivation to purchase a particular business, but they cannot obtain the answers they need and wonder if I can assist them.
When I bring the two perspectives together, I work best as a business broker by allowing both parties to act from a position of strength. Ultimately, the seller will only sell and the buyer will only buy if all parties have the necessary information to make an informed decision and, at the very least, feel that what they are doing makes sense to them.
If you plan to sell your business in California and want to do so from a position of strength, here are the steps I take to ensure I assist you effectively.
Prepare to See Your Business From a Position of Strength
If you plan to sell your business in California, you are making a significant change to your life.
By definition, owning and operating a business forces discipline, and this often includes doing things you would prefer not to do. If you therefore sell your business and undergo this significant change, what plans do you have in place to manage this transition? Be clear with the new world and options that will open up to you, so if and when your business sells, you can easily make the transition.
It’s not unusual for a business owner to reach the close of escrow and change their mind, as they are unsure what they would do if they were to sell the business. It’s also not unusual for a business owner to sell their business and want to buy another after a period of downtime, as they may become bored.
While you own and operate your current business, take care of your health, play some golf, or do things you want to do, so you maintain balance and avoid burnout. Burnout is the primary reason owners sell their businesses.
Start with a Business Valuation
If it’s time to sell the business, the first step is to conduct a business valuation.
There is no need to spend thousands of dollars on a business valuation, as it does not need to be complex. I suppose the business has partners, and they are caught in a dispute, such as the owner is going through a divorce or is facing another complex legal matter. In that case, a certified appraisal may be necessary. I compile an opinion of value that examines the last three years’ tax returns, current profit and loss statements, and balance sheets, along with a thorough analysis. See Sample Business Valuation Report Analysis.
All this information is then put into a 19-page report, which includes comparable sales data from the same industry to determine the price at which the business will sell.
Reviewing tax returns and profit and loss statements is critical, as many sellers provide financial statements that are inaccurate or would not be accepted by a buyer or lender.
Recently, I was asked by a buyer to appraise a small business based on cash flow projections the seller had prepared, and I convinced the buyer that his business was worth it. After finally getting meaningful documents and information, my value was less than half of the seller’s, as there were errors in his projections.
What About Third-Party Finance
Once the seller knows the value of their business and still wishes to proceed, one of the steps I take is to explore the available third-party financing options. Most sellers don’t want to sell the business and carry any financing.
Currently, the primary source of lending for small business acquisition is SBA lenders. These banks may consider writing an SBA loan, but they do not lend to all businesses across all industries. It’s not unusual for me to approach many banks before getting a business pre-qualified. Knowing finance is available, though, really helps the seller with their planning and speeds up the process should a qualified buyer come along.
Confidentiality is Critical
With these details in place, the next most important step is to compile a comprehensive and confidential report on the business. The confidential report can be as long and detailed as necessary.
A general rule of thumb is that the higher the purchase price, the longer the confidential report should be. Buyers have questions. If there are many buyers, you can expect a lot of the questions to be the same.
Why not have this information readily available? It makes the seller, their business and me look very professional to request a buyer to complete a non disclosure agreement and then in my case, provide them with a username and password where I have this confidential report as well as supporting documents such as a copy of the lease, franchise agreement, sample marketing material, financial statements and other relevant information.
Doing it Right
All the above items take time and planning. If you are selling a business in California and want buyers with the right qualifications to respond in a businesslike manner, take the time to do the work and get it right. A buyer has options. If the buyer doesn’t feel that your business is the right option because of how the seller answers their questions, then they will look for alternatives. There are alternatives available, including doing nothing.
Are you thinking about selling your business in California? Would you like to know the value of your business? For more information, please visit the Business Valuation page on my website.
For more immediate assistance, you are welcome to contact Andrew Rogerson or call me Toll-Free (844) 414-9700 or email me at support@rogersonbusinessservices.com.
Further reading
Calculating Capital Costs When Selling a California Business
Sell a California Small Business: How Much Tax I Need to Pay?