Selling a business not like selling a house
Is selling a business 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.
First, the price to list a business for sale generally comes from a valuation. The rules of a valuation come from the law and legal cases as well as the Internal Revenue Code and custom. The price for most other items of value come from market comparables (for example, when valuing a house), looking up a book or some online site such as Kelly Blue Book (for cars) or results from eBay or some other online service (for any item.) That is, there is no legal interference with the value of any of these items except a business.
Second, when advertising to find a buyer of these items, with the exception of 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 web sites, newspaper or magazine advertising, family, friends and anything else to find a buyer. Conversely, when selling a business, advertising is done using less familiar methods and in most cases, the advertising is obscure so family, friends, customers, employees, suppliers, landlords, lenders and others are not aware the business is for sale.
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 hidden support for buyers and sellers such as family and friends.
Fourth, when selling a business, to get the maximum price possible, normally involves a lot of work for an extended period of time. The steps the seller takes includes trying to increase revenue, recasting the financial statements to arrive at an accurate and supportable discretionary earnings of the business and repairs and upgrades to make sure the business looks the best. When selling most items, it’s easy to improve their appearance but with a business there is a limit on what the seller can do and the amount of time to do it.
When the buyer and seller reach a consensus on the main points of the negotiations, all agreements must be in writing. One of the first items it defines is whether the business sale is an asset or stock sale with this single decision has many tax and legal implications. Additionally, this one decision in itself, can set off a series of negotiations or at least, in-depth discussion and analysis by both parties.
In some business transactions, the negotiations can trigger a set of different valuations to support each parties position and whether or not the transaction ultimately closes. For example, if the purchase includes real estate or a large number of physical assets or intangibles such as trademarks or copyrights or the business itself then there could be four valuations. The first is a valuation of the commercial property, the second is a machinery and equipment appraisal, the third is an intellectual property appraisal and the fourth a business valuation.
Buying and selling a business is unquestionably complex. The complexity can include the many and diversity of different assets. Add to this the complexity of the emotions each party brings to the transaction plus 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 final outcome. For a willing buyer and willing seller to eventually close the transaction, it will require patience and clear communication and normally, the help of a good business broker and other team members.
If you’d like more information about how to transition out of your business, feel free to get in touch with me for a quick consultation. We’ll discuss your particular business, what’s important to you and make a plan for those first few steps.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.