Thinking About Selling Your Business?
Thinking About Selling Your Business?
Be Sure to Understand These Big Issues and Risks
From 2008 until 2012, the door was closed for almost all small closely held business exits. Especially in ’08, ’09 and ’10, very few people (and no lenders) were willing to take on the risk of a business purchase.
Beginning in 2012, the market began to show signs of life. In 2013, the number of sales in Central Florida increased and the market continues to recover.
Because of the five year stoppage, there’s a lot of owners looking to sell. They hung on through the downturn and are ready to move on.
A sale transaction is a critical point in the life of a small business. Things can go wrong, resulting in loss of business value and income.
These big issues and risks have to be addressed and include:
In this and future issues of this newsletter, I’ll show you how to address these big risks and issues to help you make your sale successful so you can get the most for your business in the least amount of time.
- What’s the ‘right’ price?
- Who will you sell to?
- What can you do to improve the business for a higher price?
- Should you use a broker (and pay an 8% to 12% commission)?
- Will your customers, vendors, employees or competitors learn the business is for sale?
- How will the buyer pay you? What’s customary?
- Will you be able to protect yourself and your financial future?
The first and, in my opinion, most important issue to get right is the offering price of your business.
Issue #1: Pricing Your Business.
Sally and Bob (not their real names) operated their small (literally “mom and pop”) business services company for ten years after Bob got early retirement in his 50’s from a large corporation. They decided it was time for a real retirement and contacted a broker to sell the business.
This broker came to their office and toured the business. Afterwards, they all sat down in the conference room to talk about the sale. The Broker asked what they wanted for their business.
Sally and Bob heard from a friend that businesses like theirs should sell for 1.5 to 2 times sales. So, they answered $700,000, right in the middle.
The broker scanned their tax returns and financial statements for a few minutes, then proclaimed the business worth $500,000. He listed it for $550,000 (“to have room to negotiate”) on a one year exclusive listing agreement.
Sally and Bob were excited to be just a few months away from real retirement. All that was left to be done was to find the buyer and do the paperwork.
Then, nothing happened. A few weeks went by. Then a couple of months.
After 6 months with no traffic, Sally and Bob contacted the broker. He suggested a $50,000 price decrease to get the market going. So they dropped the price to $500,000.
After 3 more months, Sally and Bob again contacted the broker. He said the market is always slow around the holidays and suggested another price decrease. So they dropped the price to $450,000.
Eventually, the listing agreement expired. Shortly after they met with me on a legal issue and mentioned the situation. I put them in touch with a reputable broker.
After he’d done an opinion of value, he had some good news and some bad news.
After preparing a written analysis of the value (using a method I’ll describe in a future issue), there was no way they were going to sell the business for $500,000 or $450,000, or even $400,000. The most it was worth was $300,000.
He went over the process he used, and showed them the data and method to arrive at the opinion of value.
Though unhappy they’d wasted a year trying to sell at the higher price, Sally and Bob were actually relieved. Finally, they understood. They told us that at first they wondered what the problem was. After 7 or 8 months that wonder turned to fear that they’d never be able to sell.
It still took several months to find a buyer and complete a sale, but with the accurate price they began to get traffic and a couple of offers.
Pricing your business correctly is the most important part of selling it. You’ve got to price it right to make sure it’s not so low that you leave money on the table, and not too high that it’s unattractive to buyers.
Interestingly, of these two potential mistakes, setting the price too high is more common. It’s also a bigger problem than setting it too low.
First, with an overpriced business you’ll cut out “real” buyers.
Our culture in the United States doesn’t haggle. For the most part, we view a price as “the” price and we won’t bargain if it’s too high. We move on to the next deal.
Consider whether or not most people are comfortable buying a car? Do they like visiting the dealer to “negotiate” over price and terms? Do they feel comfortable sitting with the dealer’s finance manger? No, no and no.
In fact, Americans are so much against bargaining that some auto dealers have developed “no haggle” pricing as point of differentiation.
Second, most buyers are first time buyers and they’re terrified. Combining that fear with the cultural no-haggle mindset, means that a buyer who gets any hint that your business is overpriced will bail. They’re looking for any reason not to move forward and you’ve just supplied it.
If you set the price for your business too high, you won’t get many (if any offers). People won’t even say they’re not interested; they’ll come up with excuses or just walk off into the sunset doing nothing.
Bottom line: you’re not getting many offers.
Finally, any offer you get will probably be a low ball. These will be from the few bold buyers who aren’t afraid to make any offer. They’re looking for super deals and know you’re overpriced. So, they figure “why not try; there’s nothing to lose.” They’re playing on your psyche.
Every owner starts out excited at the prospect of selling, waiting for the offers to come in. They’re thinking of the next thing: a long vacation, financial independence, the next business or retirement. Once a business owner decides to sell, it’s sold in his mind. He mentally starts his vacation, next business or retirement. The sale is only a formality to that new life.
But, as time goes by, the owner of the overpriced business starts to feel uneasy. As weeks and weeks pile up without any real offers (and often without any showings) the owner becomes very concerned. He might even begin to panic.
To put yourself in his shoes, imagine that one day your phone stops ringing and customers stop coming in your door. This goes on for a couple of days. Then a week. Then a few weeks. Then a few months. What would go through your mind? What would you do?
The owner’s panic is amplified because she’s trying to sell her biggest financial asset.
So, when a low ball offer comes in, the desperate panicked business owner is more likely to take it. Now she’s really leaving money on the table.
Sadly, there are a lot of brokers and transaction advisors who either don’t know how to price your business or won’t take the time to do it right.
Some brokers follow the path of least resistance. Rather than educate business owners about the true value of the business, they list businesses at any price the owner requests.
Why? Because it benefits the broker to have a lot of listings.
Listings generate buyer inquiries. Brokers know that most buyers who call about one business eventually buy another business. So, they use your listing just to generate traffic for their other listings. If they can’t sell your business to the caller because it’s overpriced, they’re happy to steer the caller to another listing.
Meanwhile, you sit and become more concerned (panicked) like Sally and Bob.
So, how do you properly price your business? I’ll show you an easy method to estimate the value of your business in the next installment.
And, in future installment, I’ll discuss more of these big issues and risks:
- The Commission Conundrum: Selling Your Business With or Without a Broker (to avoid the broker’s commission).
- Working with Business Brokers and Professional Advisors.
- Don’t Let the Lawyers Kill the Deal.
- Working with Buyers.
- Don’t Get Pregnant with a Deal.
- Holding Paper.
- Due Diligence.
- Risky Contract Terms.
On the personal side, I hope you enjoyed the holidays. I spent a lot of time with Faith, my daughters and extended family, as well as mountain biking and hiking. I’ll be mountain biking until the weather warms, when I’ll start kayaking again.
There are some fantastic mountain bike trails in Florida, including Santos (Ocala) and Alafia State Park (southwest of Tampa). Getting better skills by riding these and other trails has been great fun (not to mention a lot of exercise).
I’ve put together a list of rivers to kayak this year and am looking forward to seeing them. You can really experience the natural beauty of Florida when you’re a few inches above the water in a kayak.
Until next time.