The Truth About Selling Your Business – Part 2
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 buy 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.
9. Know more about your industry and not just about your particular business. It is in your best interest to do the research so you will understand the “intangibles” of the business and their appeal to a cross-section of buyer types by knowing your industry sector – how it is fairing, its cycle with regard to attractiveness to buyers and the availability of financing for businesses within your industry. For example, if there is a glut of similar businesses available (high supply) and insufficient buyers (low demand), value will be limited. If funding sources are eager to provide capital within the industry, values will be elevated and demand will be greater. If technology is causing a change and the business or industry is unprepared or unsuitable for change, value will be limited. Your transaction advisors can be very helpful in this regard.
10. Know your own as well. In addition to these external factors, it is imperative that a business owner understands the realities of their own business. It is necessary to know your “real” business cash flow (recasting the financials for a reality check versus tax minimization). It is vital to diagnose or analyze the business to know its “SWOT” (Strengths, Weaknesses, Opportunities and Threats) status. Buyers are more confident when they feel the seller is “open and honest” and is not hiding information or ignorant of their own specific business elements.
11. Why It Often Takes Many Prospective Buyers and Time. The fact is not everyone sees the world – or your business – the same way you do. What is exciting and attractive to one buyer can be perceived by another as inappropriate and unappealing. That is true of individual businesses and entire industries. This is another reason that it often takes many buyer prospects to find the one or more who may have a serious and abiding interest in your type of business, in your location, and with your economic parameters such as revenue, profit, etc.
12. A hard truth, but an important one! Businesses are bought, not sold. If there are no buyers, simply wanting to sell does not make it so. And price alone is often an insufficient motive for buyers to take action. Terms and conditions, “bank ability” – the capability to obtain financing for the purchase, may be just as or more important. The deal – terms and conditions – has to be perceived by the buyers as positive for them and not just for the seller, so asking price is just one piece of the process.
13. Confidentiality is critical. Be cautious – very cautious – in just how you seek these buyer prospects. “Loose lips sink ships” is the old WWII saying and it is apt for exiting businesses as well. Confidential exposure is critical to avoid the negative, even disastrous effects of poor confidentiality: employees leaving or customers bailing or competitors bad-mouthing your business or suppliers shortening terms or lenders calling loans.
14. Be prepared! Finally, the sellers who are “prepared” usually are the winners; the “unprepared” often experience defeat. As the saying goes, “luck is when preparation meets opportunity”! So, let your transaction advisors help you to be properly and sufficiently prepared and, vice-versa, make sure they have all the information needed so they are sufficiently prepared and knowledgeable.
15. Information MUST be up-to-date! Buyers are very wary – and often walk away – when information provided is not up-to-date. This is especially true when the Offering Memorandum is older – and older means more than 6 months or 1 year at most! That means, not only should the general information be kept current, but especially the financial information. Your financial needs to be accurate – P & Ls and Balance sheets generally agree with tax returns — and, very importantly, up-to-date. Showing buyer prospects old financial information or old offering memorandums puts buyers on “alert” to see if there are bad things not being shown. So work with your transaction advisor to keep everything as current as possible and that will truly help getting offers faster or at all. The cost would be minimal compared with the stronger possibility of getting a good offer.
16. Valuations are important for YOUR benefit! Valuations by professional evaluators are important for YOU so you have a realistic picture of how your business might be seen by buyers or financial institutions. If your business has changed dramatically – whether in a positive or negative manner – sometimes getting a new valuation is vital to understanding what the reality of value might be from the perspective of a buyer or the buyer’s lender.
17. Seller Financing. Perhaps the most misunderstood concept is “seller financing”. When a seller won’t “finance” (carry a note from the buyer) at all, that means the buyer is taking on 100% of the risk going forward and they will offer much less for the business because of that (often less than what could be the down payment if the seller is willing to finance some of the purchase price). Depending on the offer, seller financing is typical (and desirable to lenders to ensure success going forward) and can be as little as 10% or higher with bigger offers.
In conclusion, you and your transaction advisors are a team and need to work together to maximize the number of inquiries and to stimulate offers. Know that your IAG Transaction Specialist is there to “help” you get successfully and profitably sold. We are on YOUR team! But if we are unrealistic or don’t give you honest advice, we’re really not helping. Hopefully the points explained above, however briefly, will give you a broader understanding that selling a business is a process that takes both time and patience as well as some expertise and preparedness.
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