Selling a business is a complex and time consuming process that requires careful planning and preparation.
The problem is that most owners view selling as a simple and quick transaction and not as a process. As a result, many owners are unsuccessful in selling, or obtaining the price they envisioned for their business.
Recent surveys suggest less than 20% of businesses for sale get to the document drafting stage, and only about half of those actually close. The relatively low success rate may be due to a variety of factors including price expectation mismatch between sellers and buyers, poor financial statements, seller inexperience, and high interest rates.
In order to increase the odds of success, sellers should carefully consider their answers to the following questions.
Why are you selling?
Potential buyers will ask you why you are selling so why not come up with a response that makes sense. Common reasons include retirement, health issues, fatigue and a desire to pursue other opportunities.
Your answer needs to resonate internally and make sense to the buyer. If, for example, your business has been losing more and more money for the last few years, then the answer needs to be well reasoned otherwise it will come across as insincere.
Who are you selling it to?
Common buyers are other family members, employees, existing internal partners, 3rd party strategics, 3rd party financial buyers, 3rd party high net worth individuals, and competitors.
Once you have an idea of who you are selling to you need to ask a further question of why is the buyer going to buy your business. The reason needs to make sense from a business standpoint and not be just wishful thinking.
What is it worth?
Knowing the approximate market value of your business is one of the most important pieces of information to have in the sales process. I say market value because this figure changes all the time depending on macro and micro economic trends.
Market value is not to be confused with what you think your business is worth because you founded it 30 years ago and it is your baby.
The only reliable way to know the value, or more precisely the value range, is to ask a professional like a valuation professional, business broker or investment banker. You always have the option of getting a valuation for a fee from one of various professionals assisting sellers.
How much money do you need to maintain your lifestyle?
Once you know the market value of your business you can have a wealth manager model out your cashflows after the sale. You can compare these numbers to the salary and distributions you currently receive from the business.
If the proceeds from the sale do not leave you significantly better off than continuing to run the business, then it may be time to rethink the sale.
What will you do after closing?
This question is related to why you are selling. Nevertheless, the answer needs to resonate with you.
Selling a business that you have worked in your entire working life is a major life change and must be treated as such.
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The following are some of the most common activities owners envision post-sale: investing in another business, retirement, consulting, and philanthropy.
Will you sell it by yourself or with the help of a 3rd party?
An entire book can be written on just this topic. Regardless your answer to this question will greatly impact the odds of a successful sale.
All other things being equal using a 3rd party to help sell your business will increase the odds of success. Obviously, using another person in the sales process will increase the cost, but it will likely also increase the sales price.
A 3rd party can assist you with preparing to talk to buyers, assembling a sale document, finding and vetting buyers, marketing the business, creating an auction, negotiating the terms of the deal, and coaching you through the steps.
How will you run the business and respond to the buyer's diligence requests at the same time?
Selling is a stressful and taxing process for buyers. Having to run the business and respond to buyers at the same is challenging for everyone.
If you have a capable team to handle the day to day operations and are not personally involved in sales, then you may be able to manage the diligence process without additional staff.
If that is not the case, then you may consider hiring an employee, or outsourcing some operational/diligence tasks to a consultant.
Smaller businesses specifically can benefit from hiring a fractional CFO to help with the financial due diligence, and an expert for a seller’s quality of earnings report on the financial statements.
Will you stay on for some period of time after closing?
This is a gut check into what level of involvement you want to have after the sale.
In smaller deals, buyers without significant industry experience will want 60-180 days of your advice, time, and training. As a result, it is important to decide on your willingness to provide that time to buyers at the outset.
You should be aware that your willingness to provide post sale support will expand the pool of potential buyers to those without previous industry experience and will increase the odds of a successful close.
The information provided is intended for general informational purposes only and should not be construed as legal, tax, or financial advice.
For more information, please contact:
Kresimir Peharda
