How to Sell a Business: Part 4
This is the fourth of a five-part series on selling your business.
How to Market Your Business and How to Get the Buyer Financed
Welcome to Part 4 of our five-part series this month on how to sell a business. In Part 1, I gave you an overview of the process. In Part 2, I described the process in more detail but focused primarily on planning for the sale. In Part 3, I discussed the valuation process – the sequence that professional business brokers go through to determine what a business will likely sell for. In this post we’ll look at ways to market a business and touch on ways for the buyer to get the financing to close the deal.
There are many ways to market your business. Which one(s) you choose will depend on a few issues.
- Do you want to maintain confidentiality? Do you want your customers, employees, competitors or vendors to know that you’re looking for a buyer? We suggest keeping your intentions confidential for the reasons discussed here, but you may decide otherwise. Either way, get educated about this before going to market.
- How much time do you have to spend on the mechanics of selling – fielding inquiries, vetting those inquirers, answering emails and phone calls, showing buyers around, discussing financing, providing the reams of data customarily requested by a buyer, etc. – rather that on the operations of your business?
- How comfortable do you think you will be with the negotiation process? Selling a business generally involves a lot of negotiation. Most people think only about the price but the method the price is paid, the length of the transition period, the subsequent non-compete period, the terms of a possible earn-out, financing terms, closing date, etc., etc., etc., all must be negotiated. Some people are good at this, many are not. Which are you?
The easiest way to market your business is to use a professional business broker for reasons described here and here. However, if you choose to try it yourself, here are some ways to do so and the pros and cons associated with each.
- The Newspaper. Using the newspaper – local or national – is a bit of an old-fashioned approach but many owners still take go down this road. The biggest downsides to this method is that the number of potential buyers reached is limited to the geographic region that the paper serves, the paper’s circulation (which has likely been declining for years) and even more limited to the miniscule number of readers that are interested in buying a business and will turn to the classified section to look for what might be for sale. Even national papers – such as USA Today and the Wall Street Journal – are no longer where most buyers turn to find a business.
- Your Advisors. Your attorney or accountant are possible sources of buyers. However, they are also generally geographically limited, thus limiting the pool of potential buyers.
- Online Listing Services. There are numerous websites that will list a business for sale. Some of these are generalists; that is, they will accept any listing. Others are specialists and will accept only listings in certain industries; restaurants, for example. Still others are only for professional brokers. These sites generally charge a monthly fee.
One of the reasons to consider listing with a professional business broker is that many brokers will cooperate with other brokers. That is, they will work with other brokers to get your business sold. This approach to selling is called co-broking or co-brokering.
To give an example of how co-brokering works, when we list a business for sale, more than 500 other professional brokers know that, if they have a buyer looking for the type of business we’ve listed and their buyer closes on the deal, we’ll share the commission with them. This generally exposes our businesses to far more potential buyers than would see the opportunity if you try to sell it yourself or list it with a business broker that will not co-broke. For a detailed discussion of co-brokering, check this out. Worldwide Business Brokers has co-broking arrangements with more than 500 professional business brokers and mergers and acquisition firms around the world.
What Tools Do you Need?
Aside from social media, various internet sites, our own databases and other general tools that we’ve spent years building, we use two unique and listing-specific tools that we create for each business we list: an abstract and an offering memorandum.
The offering memorandum is generally a 15-30 page document that has all the information a buyer would need to make a decision save for a visit to tour your business and the area. The abstract is a three or four page synopsis of the offering memorandum.
We generally provide the abstract to potential buyers as soon as we receive an inquiry and, when we email it out, we include a Confidentiality and Non-Disclosure Agreement which we ask them to sign and return if they want more information. If we get that NDA back with a signature, we then send the offering memorandum.
Both of these tools are templates that we give our brokers making it easy to fill in the necessary information.
Financing for the Buyer
If you plan to try to sell your business without a professional business broker, you would be wise to be prepared to assist the buyer in lining up financing because unless the buyer plans to pay cash, financing will play a major part in getting the deal done. You would do well to remember, however, that almost all small and medium-size business transfers involve some form of seller financing. That said, let’s look at some sources of financing.
- Conventional Lenders. Banks, of course, are the first sources of funding that most people think of and logically so. But even though having the buyers go to their bank is the first thing most sellers would suggest, you might consider another approach: have the buyer go to your bank. If you’ve been with the same bank for many years and that bank has been part of the “team” that built the business, there’s a good chance that they would like to keep the business – keep your business as a client even if you no longer own it.
- Non-Conventional Lenders. For small businesses, non-conventional lenders include private lenders, “family and friends”, private equity firms, local investment groups or “angels” and others.
- Family and Friends: We’re currently advising the owners of a business that is being sold on ways that the buyer could get financed. The way this deal is going to get done is that the buyer, who has worked for the business for five years and is passionate about what the business does, is going to get financing from both immediate and extended family members. The family is familiar with the business and want their relative to realize a long-held dream of owning it. Your advisors – attorney, accountant, financial planner, etc. – fall in this category. They each have clients that might be interested in making financing available to the buyer. Your advisors are probably familiar enough with your business to have their comments to other clients about the opportunity taken seriously.
- Hard Money Lenders: This is not a source that I would recommend for any but the most specific circumstances. Hard money lenders are for short-term money; usually less than a year. They also focus primarily on riskier investments and therefore charge a “risk premium” in the form of higher interest rates. In addition, this source of funding is good only when there are assets to secure the loan. Most hard money lenders will only consider a transaction when real estate secures their money. There are a number of sources for hard money. It has been many years since I used this type of financing and so cannot recommend any specific sources but if you search for “hard money lending sources”, you will find a wealth of information.
- Private Equity Groups. These are businesses that want ownership; they want equity in what they invest in. If your buyer does not have the financial firepower to pull off the purchase, check with your advisors (attorney, accountant, financial planner, etc.) to see if you can provide the buyer with contact information for one or more private equity groups. We work with a number of such investors and may be able to help your buyer find one that fits. If you want to discuss how we might be able to assist, put a comment in the comment box below or send me an email directly.
- Local Investment Groups. Sometimes referred to as “angels” – in the tradition of small investors that fund startups – there are many local investment groups that want to help keep a local business afloat and, more importantly, keep it from moving out of the area and taking jobs with it. Most of these groups are interested in equity; that is, they want some amount of ownership in the business. However, the deal can be structured so that the buyer of the business can buy the equity back over a certain time period and on certain terms.
- Small Business Administration. This option is for sellers of US businesses but is available only if the buyer is a US citizen or in possession of a green card. The SBA has multiple programs that should be explored if the buyer is qualified from a citizen standpoint. For a detailed discussion on SBA financing, I suggest that you listen to this interview with Dave Moore of Acclivity Financial, an SBA Preferred Lender.
- Seller Financing. It is likely that you, as the seller, will have to provide some financing. Some buyers will want you to be the sole lender. Others will look for you to close the gap that remains between the combination of their cash injection plus a lender’s commitment and the purchase price. Get comfortable with that concept early. There are many safeguards that can be put in place to minimize your risks but seller financing is almost certainly going to be involved.
As I mentioned above, seller financing, to one extent or another, is involved in the majority of small business transactions. Even in the case of roll-ups – transactions that involve a large company buying up multiple smaller businesses in a specific sector – the buying company will, in many cases, require that the seller take back a note or that the sale be structured as an earn-out. Obviously, as the seller, you want to keep the amount that you finance as small as possible and the time frame for the final payoff as short as possible.
There are many issues to consider when you finance a portion of the purchase price and proper documentation is critical. A professional business broker or an attorney that specializes in business transfers should be part of your team.
I hope that this post answered some of your questions and concerns about trying to sell your business yourself. I still strongly suggest that you hire a professional to handle what is generally a fairly complex transaction but this and the past three posts should give you enough information to determine if you want to do this yourself. Next week will be the final of five posts relating to selling your business. If you have any questions, leave them in the Comments box, below, or send me an email. If we get enough on the same topic, I may do a post or podcast tackling that topic specifically.
I’ll be back with you next week.