The Truth About Selling Your Business
By: David Michaelson – Senior Transaction Advisor for IAG
In this 2 part series – David Michaelson gets some real talk going to help you understand more about selling your business, how it is viewed by buyers, and what to expect to – all to help you sell better, faster, & more profitably!
- Takeaway: Sometimes a reality check is what it takes to sell your business successfully – as told from an industry veteran with dozens of deals under his belt.
If a business owner/entrepreneur – that’s you — wants to successfully sell — exit or transition — their business (that means to actually enhance its value or sell the business for maximum value), it is essential that he or she understand that this is a process and not an event! These points will serve as a broader understanding of both the elements in that process and the realities of the market place.
What should a business owner understand in order to properly sell their business and gain a profitable exit? Here are a number of important considerations in that process:
- Be realistic! Often the biggest obstacle in selling a business successfully is the seller’s lack of understanding – or refusal to accept – the reality of their business’ true market value as it would reasonably be determined by a prospective buyer or a financing lender. When the asking price is far above what a reasonable – and responsible – buyer would pay or could borrow from a lending institution that will independently value the business, the likelihood of a successful sale is remote and often impossible. And it’s not only about price. It is also about location, key personnel in place, current inventory or assets, and both history and future prospects.
- Change is another factor in what a business might realize in a sale as change is the only constant we truly have in life. Often it is something outside our control that changes: the economics of the country, a pandemic, new technologies, credit crunches, consumer tastes, loss of a key client or employee, new competition, health issues, sources raising prices or changing products, and so much more. Less frequently it is something within our control. Denial, unawareness or ignorance of this fact, or stubborn insistence on your vision versus the current reality, only makes the possibility of a successful sale less likely, but change will nevertheless occur and it factors into how a business is valued. For example, when interest rates are really low, offers can be higher. When interest rates are really high, offers will absolutely be lower. When there is a large inventory of businesses on the market, offers will be lower and less frequent than when there are a limited number of like businesses for sale.
- Market Adjustments might be necessary if a business is not attracting buyer prospects or it is getting prospects who walk away quickly or make very low offers compared to the asking price. The market will educate you if you pay attention. If it is doing what is depicted above, that is getting no or low offers, then a careful look at asking price or the marketing ad or the marketing vehicle needs to occur and changes made to adjust or respond to what the market is telling you.
- Patience is a virtue! Expectations can cause issues. It will almost always take longer to get a fair offer than you would think. Often, for every 10 buyer prospects who inquire, 9 of the 10 are not serious buyers and are “window shopping” and looking at either multiple businesses to find their desired “diamond” or have very specific criteria that your business doesn’t have or they find something – whether financial or location or personnel – that turns them off. While the serious buyer could be the first, he or she is more often than not somewhere further down the line of buyer inquiries. And, on top of that, even if they do have a serious interest, they may not respond with an offer for days, weeks, or months. Urgency to buy is far less prevalent than urgency to sell!
- What doesn’t change is that all businesses will inevitably — some day, sooner or later – transition. They will either close or pass to heirs or be sold. Most business owners understand that selling their business is typically the most profitable route. So if selling is the option of choice, and it usually is, then understanding the process and the important points identified in this article, will be extremely valuable.
- What buyers want may not be what you think. Recognize that the principal reason buyers purchase is for a Return On Investment (ROI). Whether they are purchasing for strategic reasons (probably a competitor or another company), personal or economic motives (likely an individual buyer or family moving to the area for personal reasons), or financial gain (typically investors), all buyers ultimately are seeking to profit from their purchase by getting a suitable (to them) ROI. Since it goes without saying business owners are not likely going to sell to themselves (and rarely get any or fair payment if they pass the business to their children), it is critical to a successful exit plan to think like a buyer, not like a technician or a collector or someone parting with a precious heirloom that they are reluctant to let go. These emotional indecisions will kill more potential sales than any other single factor.
- Buyers look to the future when they will be the owners. The fact is rarely is a buyer buying for the same reason or reasons a seller is selling. The buyer is likely not buying for where the business has been, or even where it is today, but rather where he or she can take it in the future. And, location is important if they are planning to move to personally run the business or even if they plan to only oversee the business but travel time and distance become critical. So factors like personnel, contracts in place, competition, stability of revenue or its growth or lack thereof are important considerations to a prospective buyer.
- Beware of skeletons in the closet! Buyers believe in “caveat emptor” – “buyer beware” – and finding things that were hidden or not declared and explained will, in 99% of the cases, cause the buyer to lose faith and walk away. It is important to be truthful – but, at the same time, to be smart in how you declare or disclose any problems. Your transaction advisors can be very helpful in this respect in many ways: they can be the ones to talk about the potential problems and explain them without being defensive or seeming to be defensive, they can help you know how best to present that information or explain it so it doesn’t scare a buyer away, and they can assure the buyer that this is minor or can be handled.
We have industry veteran transaction advisors who are waiting to help you sell your business!
Stay Tuned For Part 2
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