Selling a business is NOT like selling a house.
Not everyone will agree, but I am sure it’s close to the truth that buying or selling a business is unlike anything else. Here are four reasons.
Business Valuation
First, the price to list a business for sale generally comes from a business valuation. The rules of valuation originate from the law and legal cases, as well as the Internal Revenue Code and established customs. The prices for most other items of value are derived from market comparables (for example, when valuing a house), by looking up a book or an online site, such as the Kelley Blue Book (for cars), or by obtaining results from eBay or another online service (for any item). That is, there is no legal interference with the value of any of these items except in a business.
Advertising is Often Obscure
Second, when advertising to find a Buyer of these items, except for a business, there are no rules. To be clearer, when selling any other item, the owner wants the world to know it’s for sale. The Seller or their broker uses regular and established advertising channels, including online websites, newspaper or magazine advertising, and word of mouth, as well as other methods, to find a Buyer. Conversely, when selling a business, advertising is often conducted using less familiar methods. In most cases, the advertising is discreet, so family, friends, customers, employees, suppliers, landlords, lenders, and others are not aware that the business is for sale.
Negotiations are More Complex
Third, when a Buyer and a Seller enter into negotiations for anything except the business, it’s generally very simplistic and does not need the involvement of third parties. In contrast, negotiating a business often involves complex negotiations with sophisticated parties. These parties can include lenders, landlords, attorneys, accountants, business intermediaries, or business brokers, as well as a hidden support for buyers and sellers, such as family and friends.
Getting the Best Price Involves a Lot of Work
Fourth, when selling a business, obtaining the maximum price possible typically requires a significant amount of work over an extended period. The steps the Seller takes include trying to increase revenue, recasting the financial statements to arrive at accurate and supportable discretionary earnings of the business, and making repairs and upgrades to ensure the business presents its best image. When selling most items, it’s easy to improve their appearance, but with a business, there are limits on what the Seller can do and the amount of time available to do it.
When the Buyer and Seller reach a consensus on the main points of the negotiations, all agreements must be in writing. That is, one of the first items it defines is whether the business sale is an asset sale or a stock sale, with this single decision having numerous tax and legal implications. Additionally, this one decision can set off a series of negotiations or, at the very least, in-depth discussion and analysis by both parties.
In some business transactions, negotiations can trigger a range of valuations to support each party’s position and determine whether the transaction ultimately closes. For example, if the purchase includes real estate, a large number of physical assets, or intangibles such as trademarks, copyrights, or the business itself, then there could be four valuations. The first is a valuation of the commercial property, the second is an appraisal of machinery and equipment, the third is an appraisal of intellectual property, and the fourth is a business valuation.
Buying and selling a business is unquestionably complex.
The complexity can encompass the multitude and diversity of different assets. Add to this the complexity of the emotions each party brings to the transaction, as well as the fact that it can sometimes take many months to finalize the deal. In addition, other layers of complexity include ‘life’ events such as health, legal, family, finance, and many other items that affect the outcome. For a willing Buyer and a willing Seller to eventually close the transaction, it will require patience, clear communication, and, typically, the assistance of a skilled business broker and other team members.
If you’d like more information on how to transition out of your business, please don’t hesitate to contact me for a brief consultation. We’ll discuss your specific business needs, what’s important to you, and create a plan for those first few steps.
For more immediate assistance, you are welcome to send an email to Andrew Rogerson or call me at 916 570-2674.