18 Lessons Learned from over 100 Years of Combined Business Buying and Selling
By David Michaelson of IAG M&A Advisors
Most sellers don’t expect the exit from their company to be easy but many are surprised by how difficult it can be to sell their business for a good price in a reasonable timeframe, especially in the current economic environment. The majority of frustrations and challenges sellers experience could be avoided easily with a little information upfront about the pitfalls of selling a business in today’s market.
Following is a list of 18 solid lessons that could have the most significant impact on both the business sale and the owners peace of mind.
IAG has worked with many business sellers and many more potential business buyers over the 100 plus combined years of experience and truth be told: it’s never easy getting a deal accomplished!
However, we have always strongly believed and firmly advocated that the absolute best way for an entrepreneur to successfully get into business, or expand what they already have, is to buy an existing profitable company. Although there are many obstacles and pitfalls along the way that must be overcome, we feel that this list of hard earned and learned lessons will help guide you through to the completion of a successful deal.
Lesson #1: Insufficient Preparation:
Lack of preparation is by far the most common mistake that small-business owners make. Just like you would spruce up your house before hanging a “For Sale” sign in the front yard, it’s important to address several key aspects of ones business before listing it in the business-for-sale marketplace. Financial documentation, sustainable profitability, lease issues, staffing problems and other concerns will not only impact salability but also the price the business will command in the marketplace. It is rarely too early to start the exit process but often too late!
Lesson #2: Overconfidence:
There’s nothing wrong with being confident that you are going to successfully sell your business at a good price–unless your confidence causes you to neglect activities that are necessary to make your sale a reality. Far too many sellers go into the selling process with the confidence that they will get top dollar for their business simply because they believe that is what it is worth. In the real world, valuation is based on quantifiable criteria, not the owner’s personal estimation of worth.
Lesson #3: Unwillingness to Leverage Professionals:
The business owner is an expert at running his or her business–not selling it. Yet it’s always surprising how many sellers are averse to hiring a professional business intermediary to facilitate the sale of their business. You may want to enlist the knowledge of a professional that will assist in documentation and valuation expertise, national and international marketing, buyer location, stimulation of offers, scenario structure to overcome challenges, etc. while the business owner concentrates on maintaining and growing the business to prevent loss of value.
Lesson #4: Taking a Hands-Off Approach:
Once you’ve hired a professional intermediary, your work is done, right? Not a chance. Unfortunately, many sellers make the mistake of disengaging from the selling process once they’ve signed an agreement for representation by a professional intermediary. Once they have found a few qualified buyers, you’ll play a key role in instilling confidence in the buyer that the business can be purchased and managed successfully.
Lesson #5: Failure to Pre-Qualify Buyers:
Early pre-qualification of prospective buyers is essential for a successful business sale. That’s another reason to engage a professional intermediary. They have procedures and can require information that a potential buyer would not provide to a seller as that would be like showing your cards to your opponent before you bet.
Lesson #6: Misrepresentation:
As a seller, you are tempted to always want to portray your business in the best possible light. However there is a big difference between representing your business in the best light and misrepresenting your business to prospective buyers. At some point during the selling process you may be tempted to exaggerate numbers, distort projections or even cover up problems. Remember that misrepresentations send up red flags when prospects review the actual financials and can become the basis for walking away from the transaction or legal action after the sale.
Lesson #7: Pricing Problems:
Inexperienced sellers have a tendency to set a price (usually on the high side) before they’ve determined value. The reason this is such a big mistake is that price is the single most important factor in determining how long a business stays on the market. Sellers who have taken the time to have an independent valuation process performed before assigning an asking price are more in touch with marketplace prices and better positioned to defend that price and to reap the benefit of a faster, smoother sale.
Lesson #8: Only Entertaining All-Cash Offers:
All-cash sales are unrealistic in today’s business-for-sale marketplace. They can also be detrimental to sellers from a tax perspective. Instead of handing over a big chunk of cash at closing, today’s buyers are more likely to need concessions in the form of seller financing, deferred payments or assistance in obtaining third-party financing. The benefit to a seller is that spreading sales receipts over a multi-year period can enable the seller to avoid higher tax brackets. Perhaps even more importantly, the selling price can be higher with owners financing some portion of the sale (typically 10% to 25%) with interest over some agreed time frame and a sale of the business is likely to only happen if the seller will carry some of the financing.
Lesson #9: Breaching Confidentiality:
Confidentiality is important, perhaps absolutely critical. If the word gets out that a business is on the market, it could adversely affect sales and profit, could cause impaired relationships with employees, perhaps losing key staff and could worry vendors or creditors into demanding early payment or changing terms. A professional intermediary will know how to simultaneously market your business and maintain strict confidentiality.
Lesson #10: Failure to Address Transition Issues:
Many owners focus on selling their business and don’t understand there is a required transition process that will occur after closing. Some buyers will insist on the seller remaining on for a few months to assist with the transition or training while others prefer a clean break. A bias professional intermediary can advise and help both sides.
Lesson #11: Lawyers (and Accountants) can be Deal Killers!
There certainly is an important role for a competent commercial law attorney to advise and prepare the legal structure of a business purchase and sale transaction. The problems arise when lawyers (or accountants) see themselves as business negotiators whose mission it is to get the “best deal” for their clients. Usually, an attempt at a lopsided deal for either party will result in “no deal” at all.
Lesson #12: A Business Is Worth Only Whatever Someone Is Willing To Pay For It At A Particular Point In Time!
Buyers and sellers are natural adversaries; the sellers want as much as they can get and the buyer wants to pay as little as possible. Most small businesses sell for a price in the range of 2 to as much as 5 times earnings; the smaller the profit the lower the multiple and the higher the profit, the higher the multiple.
Lesson #13: A Business Buyer Is Really Buying A Stream Of Earnings!
Many first-time sellers of business think they can sell a business for x dollars PLUS the value of their assets. The assets of the business, from the perspective of almost all buyers, are just the tools of the trade that enable an earnings stream to be realized. Without the earnings stream, the business essentially has no value other than the liquidated value of the assets (often at 10% to 30% of the real value). Recasting financials and forecasting future earnings is a very important part of the acquisition processs.
Lesson #14: Most Sellers Are Fibbers!
(Or They At Least Stretch The Truth) Of course, this is not a completely true for every seller but a good rule of thumb to follow. Most sellers are honest people trying to get by in life like everyone else. However, buyers approach all information provided in the sale with some skepticism. Buyers are making a major financial decision and must carefully consider all information presented during a detailed due diligence process.
Lesson #15: Often If A Seller Really Needs To Sell, Buyers Probably Shouldn’t Buy!
Whenever buyers look at any business for sale they approach the situation with a great deal of caution. They make it their business to verify all of the facts possible about the business including determining the reason for sale. There are some very good motivations for sellers to sell and other ones that are not so good. Usually the best reason for a sale from the buyer’s perspective is the planned retirement of the owner or a sale necessitated by illness. By far, the best potential purchase is a long-standing single-owner profitable business where the owner is approaching (or at) retirement age and is generally reluctant to sell but realizes that he or she eventually has to. Sellers need to be prepared to explain their motivation in selling; another reason to start the exit process well in advance of an immediate and desperate need to sell.
Lesson #16: 99% Of Potential Business Buyers Never Buy A Business!
This alone may be reason enough for a seller to retain a professional intermediary to represent them in selling the business. A professional knows how to sort through the many non-qualified buyers to get to the few who actually do have the means and motivation to buy a business.
Lesson #17: Buyers Always Assume There Are Skeletons In The Closet!
Most businesses have some negative feature(s) that the seller may be reluctant to talk about. You can be sure that any problems will come out later as buyers begin analyzing the business (due diligence), and it could kill the sale if the problems are perceived as cover-ups.
Lesson #18: Negotiations Must Stop At The Signing Of The Purchase And Sale Agreement!
Once the Purchase and Sale Agreement has been signed, by both the seller and buyer, there is an excellent chance that the sale will actually take place. But, there must be an end to the negotiation process or things will begin to unravel. The deal at this point is like a house of cards with many parts of the negotiated deal contingent on another part. Trying to reopen negotiations after a Purchase and Sale Agreement has been signed will most likely lead to a collapse of the entire deal.
In conclusion, selling a business is a complex process.
Getting the assistance of a professional intermediary may be the difference in being properly prepared, getting qualified buyers interested, confidentially marketing the business, and getting the transaction across the finish line successfully.
David Michaelson is a Senior Transaction Specialist with IAG M&A Advisors and is very experienced in the acquisition and sale of companies. He has owned many businesses himself, has an MBA in Business Management and has been the CEO, COO, and/or CFO for multiple enterprises over the years. David has been affiliated with IAG for the past 28 years and has successfully represented both sellers and buyers throughout North America and across a variety of industries.
IAG has been helping businesses of all sizes achieve the results they desire by providing quality intermediary services that help our clients exit their businesses successfully. With over 100 years of combined experience in the M&A industry, IAG has helped the owners of privately-held companies “cash in” on all their hard work and get the best payoff possible, producing over $1Billion in transferred value for our clients. We are one of the few business brokerage & intermediary firms that has achieved consistent top ratings & awards by industry qualification organizations, backed by client reviews. From our A+ rating with the Better Business Bureau to our International Business Brokers Association Certification, our clients are always in good hands.
Our experienced M&A Team of pros can help you with all of this and more!
IAG M&A Advisors is a business intermediary consulting firm, facilitating the buying & selling of businesses. With over 100 years of combined experience, the IAG team has been a leader in the industry by helping the owners of privately held companies “cash in” on all their hard work and get the best payoff possible.
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