Selling Your Small Business — The 23
What is the best kept secret in the business for sale arena? There are two actually. First, most businesses are sold by the owner — not a broker. You would never know that by scanning the content on the Internet. It seems like most advice begins and ends with, “hire a business broker”.
The second best kept secret is that neither owners nor brokers have a very good success rate. Its about 20% whether you hire a broker or go the for-sale-by-owner route.
To be sure not every business on the market is desirable. And in some case the seller is inflexible on price. This may just mean the seller isn’t actually ready to sell.
But what if you truly are ready to sell your business? And what if you want go the for-sale-by-owner route? Well, there are never any guarantees but here is a list of things you must do and concepts you must understand if you are going to be successful.
Read this list. Learn the ideas, memorize the facts, complete the activities and you will maximize your chance of success
1 — The most qualified, desirable buyers have the most options: You are going to have to compete for their business just like you compete for customers.
A buyer who is qualified to buy your business is qualified to buy lots of other similarly priced businesses too. The reason they are qualified is because they are smart — you can be sure that they will consider many other businesses beside yours. And one option they always have available is the option to do nothing. In fact that is what most prospects wind up doing — nothing. 9 out of every 10 people who respond to a business for sale ad or contact a broker never actually buy a business. That leads us to the 2nd Commandment.
2 — Take responsibility for moving the sale along to the next step: Don’t wait for the buyer to follow up with you or initiate the next step in the process. If you wait for them to make the next move you may sitting by the phone for a long time.The best buyers will consider many different businesses. Don’t
assume they are only focused on your business. Whenever you speak with a prospect always let them know what they next step is in the process and try to set up a time to take that next step. ( Learn More)
3 — Having one buyer is the same as having no buyers: Even if you do everything right, your favorite prospect may choose to buy someone else’s business instead of yours. You can never let your success depend on the decision of one person. They may behave irrationally or illogically. Or through no fault of your own, they may choose to buyer someone else’s business. And that leads us to Commandment #4.
4 — You must always be in the process of locating and qualifying additional potential buyers: Since we know that the most qualified buyers have the most options it is very possible your favorite prospect might not buyer you business — even if you do everything right. We also know that 9 out of every 10 people who respond to a business for sale ad can’t won’t or don’t ever buy a business. So you can never let yourself become dependent on just one prospect. Always be in the process of locating addition prospects. You never know which one will turn out to be your eventual buyer.
5 — You must price the business based on its proven profits not based on what you want or need: A buyer will only give you money for one reason — they want to enjoy the benefits of the future profits of the company. Therefore you must price the business based on proven earnings (profits). Specifically, you should use the “Owner’s Benefit” as the basis of your calculation. (Go Here Learn More About Owner’s Benefit”)
6 — Do not base your selling price on a rule of thumb: Even if it is common practice in your industry. What matters to the buyer is earnings. Rules of thumb based on sales or growth rates don’t really speak to the
buyer’s goals. And if you valuation doesn’t make sense to the buyer they will not pay any amount of money for your business. (Go Here To Learn More)
7 — You should develop a price range not an exact price: Then start the negotiations at the very top of that price range. There is nothing magical about your business valuation calculations. There is no dollar figure that represents the true value of your company. In fact, you shouldn’t even be interested in the theoretical value of your business. You want to find out what is the highest price a real human being will pay for your business. (Go Here To Learn More)
8 — The business valuation process is just the beginning of the pricing process: Your business is worth nothing separate from what a real buyer with real money will pay you. So get the businesses in front of those buyers as soon as possible to see what the market thinks of your business. The eventual price you get will be based on the best agreement you can strike from among the many prospects you find. A recent survey from BizBuySell found that, in the first quarter of 2014, deals closed at around 89% of the original asking price. Maybe you will do better. But realize that buyers always try to negotiate. Also, depending on the conditions in your local market, it may just be the case you won’t find anyone who can pay your original asking price. And that leads us to the next Commandment.
9 — You must adjust to feedback you get from market: Another way to phrase this commandment could be, “Be prepared to negotiate”. On the one hand you never want the opinion of just one buyer to drastically change your asking price. On the other hand, if you get similar feedback from 3 or more buyers, each indicating your price is too high, you need to listen to what the market is saying.
Get the best deal you can from the prospects you have found. Otherwise take the business off the market and try again in a year or two. If in that time you can grow your bottom line you may be able to get the price you want. But if 3, 4 or 5 prospects tell you they won’t pay your price then you can’t sell your business for that price at this time.
10 — When you do negotiate let the buyer go first: You have already stated your price in your advertising and marketing materials. If a buyer asks you what you “really want for the business” and you quote a price lower than what you advertised, then you are negotiating against yourself. They know what your asking price is, if they want to make a counter offer, let them. Then ask them to justify it.
11- Offer financing — I know you probably don’t want to. But if you want to sell sooner rather than later and put more money in your pocket you really need to. According to BizBuySell.com over 80% of small businesses sales include some form of seller-financing. And according to Tom West at Business Broker Press, businesses that sale for all cash bring in an average of 69% of the original asking price.
12 — Realize that the negotiations should be more about terms than price: Once you have decided to offer your buyer some financing the discussion will change. The buyer’s decision will come down to whether or not they can afford the monthly loan payments. That is a good thing because it gets the focus off the price. You can always lower the payment by extending the terms by 3 or 6 months. Or by lowering the interest rate half a point. Meanwhile the price stays the same.
13 — If you offer financing, make sure you get paid: Yes, financing the sale does bring some complications….. and risk. Here are 9 actions you can take to protect yourself.
14 — Never give the buyer a reason not to pay you: If you lie or knowingly hide the truth about your business you are giving the buyer an excuse not to pay you. A big part of the sales contract is the representations and warranties. This is basically where you vow that everything about the business is as you have represented it to be. When a seller hides the negative aspects of a business from the buyer it is usually uncovered during due diligence. Usually killing the sale. Another way to phrase this commandment is: “buyers aren’t stupid, don’t try to trick them”. UPDATE: Recently Pepperdine University release results from an in depth survey of business brokers and M & A specialists. The brokers reported that 12% of all deals eventually fell through because of “seller misrepresentations”.
15 — “For Sale By Owner” does not mean by yourself: For-Sale-By-Owner means you are not using a broker. It doesn’t mean you are not going to rely on your lawyer and accountant. You should have professionals to help you with the legal, tax and accounting aspects of the sale. A good lawyer should help you prevent any of the problems related to Commandment 14.
16 — The sale of a business is a fragile things — don’t let your lawyer or accountant kill the deal: It is your lawyer’s job to protect you from legal trouble. It is not his job to negotiate the deal. Sometimes a lawyer wants to “WIN”. If there is some legal issue with the deal then by all means, follow your lawyer’s advice. But you don’t want your lawyer trying to renegotiate the price and terms you already worked out with the buyer. Let your lawyer know it is your business and this is the deal you want. And it is his job to help make it happen.
17 — Keep the sale confidential: Business owners often feel an obligation to tell their employees of their intention to sell. You should resist that urge. It can take a long time to sell your business. Maybe 6 months to a year. That is a lot of time for things to go wrong. Not only will your employees become distracted and possibly start searching for a new job, but news of your sale could make suppliers less likely to extend terms and customers less likely to enter into new agreements. And then there are all the ways your competition may use the news of your sale against you. (Click Here To Learn More About The Importance Of Confidentiality)
18 –You must have some way to share information with buyers while maintaining your confidentiality: You have to strike a balance between educating your buyer about the business while not sharing too much information and not sharing it too soon. (Click here to read how).
19 — Offer to stay on after the sale to train the buyer: Your offer to stick around for a specified period of time for some on-the-job training will make your business much more attractive to buyers. Most buyers view training as being very valuable. Just look at how much money people spend on franchises — in large part because of the training that comes with it.
Also, most small business buyers are first time owners so a basic education in how the business works is even more important to them. And buyers are more likely to trust a seller who is willing to provide training after the sale — a seller with something to hide will be out the door ASAP.
20 — You must “Recast” Your financial statements: Most small businesses are run in such a way as to minimize taxes. You get more economic benefits — car, travel, retirement account, employment for family members — than shows up on the bottom line. Don’t try to prove the worth of your business with your tax returns or regular financial statements. Have your accountant produce a set of recast financial statements. (Go Here To Learn More About Recasting Your Financial Statements)
21 — Use your “Business For Sale” advertising to attract prospects, Don’t to sell the business or hype it:Buyers scan business for sale ads looking for a few of their hot buttons. If your business type, location and price are close to their target they will contact you. That is all you can hope to achieve with your advertising — catch the interest of prospects and get them wanting to know more. You can’t tell them every last detail of
the business. You can’t sell the business through an ad — so don’t even try. And don’t use patently absurd hype like “THIS BUSINESS IS A GOLD MINE!!!!” You don’t believe that and neither will a prospect. (Go Here To Learn More About Writing A Great Business For Sale Ad)
22 — Know why you are selling and be able to explain your reason to the buyer: Sometimes owners fail to reach an agreement with a buyer because they really don’t want to sell. It is not unheard of for a seller to have a change of heart halfway through the process. The decision to sell was made at a momentary low point. It was based on emotion.
If that is the case there is no shame in taking the business off the market. But you don’t want to be the kind a seller who works hard with one buyer after another and then always sabotages the deal in the end because you are not ready to part ways with your baby.
23 — Do everything you can to lower the buyer’s risk: A reasonable buyer knows that risk is part of the equation when going into business. So they will always look at businesses that are for sale with the idea of limiting their risk. Not eliminating it entirely, just minimizing it. While you want to present your business in a best-case-scenario light the buyer will always have the worst-case-scenario in the back of their minds.
If you have legal issues or contingent liabilities hanging over your head you may be better off taking your business off the market while you work those things out.
Another signal of risk is when a business has just completed an unusually good year. If you have been bumping along at the the same profit levels for the last 5 or 6 years and then suddenly last year profits jumped 50% …….. well, a buyer isn’t going to trust that sort of performance. They will assume it was due to some temporary fix that can’t be duplicated.
Remember in Commandment 1 when we said the best prospects have the most options — and they always have the option to do nothing? If your business seems risky to the buyer then nothing is exactly what they will do.
List Your Business For Sale w/ TheBizSeller.com We Pre-Screen Buyers For You…. Guaranteed Confidentiality….. Never Pay A Broker’s Commission No Long Term Commitments …. $49.95 Per Month … For-Sale-By-Owners Only — No Broker Allowed Click Here For Details
Originally published at www.thebizseller.com.