Selling Your Business; Get Educated!
Selling your business is an exercise fraught with uncertainty and misinformation. If you want to get the most value for your business when you sell, you must educate yourself about what it will take in terms of knowledge, talent, value and time. And, unless you’ve been properly trained and have nothing better to do, a business owner is unlikely to have any of that.
Selling a business is a process. Like any process, this one requires certain steps to be taken in a certain order. From assembling the records that will be necessary for a buyer’s due diligence and determining what kind of offers the business is likely to attract to developing a list of likely buyers and preparing the documentation needed to close the deal, there is a long list of actions that must be taken successfully sell a business. A professional business broker can perform many of these functions but, more importantly, the broker can coordinate with the members of the team. (See “Talent”, below.)
“Knowledge” includes knowledge of the marketplace; knowing what a business is worth, where the likely buyers will be found, the type of marketing that should be done and the types of collateral pieces that must be prepared for that marketing effort.
“Knowledge” also includes knowing how to get the acquisition – or, rather, the buyer – financed and where that financing is likely to be found.
What I mean by “talent” is assembling the right team. Depending on the size of the business, four specific “talents” should be considered. The business’ accounting firm and attorney will be needed; the accountants in the early stages and the attorney throughout the process but particularly during the preparation and review of transaction documents.
For larger business, the owners would be wise to consult with a financial planner. This is particularly true when the seller is trying to minimize capital gains and plan for their lifestyle in the years after the business is sold.
The final member of the team – and the one that is most critical in guiding the process from beginning to end – is an experienced, professional business broker or mergers and acquisitions specialist.
If you don’t know what the business is worth, you’re wasting your time and the time of everyone else involved.
Without a valuation, you’re only guessing. If you guess too high, the business will never sell. If you guess too low, you leave money on the table. And a business owner doing their own valuation is like a doctor performing their own kidney transplant. Always remember the adage that “a lawyer that represents himself has a fool for a client”.
Having a third-party perform a valuation of the business is, arguably, the place to start. What is the business worth? Is it enough to support the lifestyle you want after the sale? if it isn’t, how can you increase the value?
Having a professional valuation in hand and bringing the business to market near that value gives support and justification to the asking price. A professional valuation is an extremely valuable selling tool. It almost always eliminates low-ball offers and tire-kickers.
Who can perform a valuation? Professional business brokers who have taken business valuation courses generally can. Certified business appraisers can. Accountants and attorneys generally cannot.
How much time will it take to sell as business? Well, that depends on a number of factors, the most significant of which is the the amount of money the seller wants in relation to the value of the business. As a rule, a properly-priced Main Street business will take between seven and 12 months to sell. To sell more quickly, offering it at a discount to value is the place to start.
In the Middle Market, it is not uncommon for a sale to take longer, sometimes MUCH longer. And the owner needs to run the business – continue building value – while the selling process plays out.
When do you start? Ideally, the owner has been planning for their exit from the beginning of the business but in reality, this is generally not the case. But planning for a sale should begin about five years prior to the owner’s target date. This is the time to focus on building value. It is critical to keep in mind that the three years prior to trying to sell are the most important from the standpoint of the buyer. That is the time to maintain scrupulous records and focus on the bottom line. If the seller has been taking cash out of the business, this is the period to stop. Nobody pays for “phantom cash“.
Once the marketing begins, assuming the marketing is done properly, there will probably be a stream of inquiries in the early stages. Unfortunately, most of these inquiries will be from dreamers who do not have the financial ability to buy the business. Someone has to sift through these inquiries and cull the tire-kickers from the real buyers.
This process takes a lot of time. Business owners have a choice: try to do this themselves to the detriment of the business or focus on the business to build its value and hire a professional business broker to handle all the work related to the sale.
The Business Broker
Business brokers vary in their practices. Some focus on certain business types (i.e., restaurants, medical practices, logistics and distribution, and retail, for example). Others focus in certain size businesses (i.e., the Main Street, i.e. ‘mom and pop” market or the Middle Market). Still others focus on a geographic area such as London, Los Angeles or Sao Paulo.
On the other hand, some brokers are generalists; they will attempt to help any owner sell. In our experience, generalists proliferate in the Main Street market.
The business owner’s job is to find the right broker to fit the owner’s personality, the type of business to be sold and the geographic scope of the probable buyer group. (A couple of examples of “geographic scope”: a three-location bridal shop in Omaha, Nebraska, or Nice, France, would likely be of interest to residents of those cities while a logistics and distribution firm in Hoboken, NJ, or Rotterdam, the Netherlands, would likely be of interest to other logistics or distribution firms around the world.)
The current level of technology allows many business brokers to work from anywhere. As you know, the name of the business I founded in 2001 is Worldwide Business Brokers. In accordance with that name, in addition to our offices in the United States, we established licensed operations in South America, Europe and Central America early on. This gave some indication that, if we licensed others to open satellite offices pretty much anywhere, we could facilitate the sale of business around the world.
But I wanted to take this one step further…
I sail. About 12 years ago, I wanted to see if I could run the business from the proverbial “back of the boat”. So, I ran a multi-year test. I bought some property in a rural waterfront area and, though I kept our office in the city open and functioning, I began to spend more and more time away from the office. Over time, as technology continued to advance, I found that I could perform all the tasks of a business broker – as well a train new brokers around the world – from my pastoral retreat.
I say this to illustrate that a broker does not have to be local to the business being sold. In my experience, not many brokers operate like this but some do. You can scour the internet for brokers and you’ll find a ton of generalists. But if you spend some time on a few of their websites and stalk their social media pages, you may be able to get a sense of their practice and professionalism. You should be able to develop an initial interview list of eight or 10. Do a live, online interview using Skype, Zoom or some similar web service. Find one or two brokers whose personality is compatible with yours. Have a couple of online conversations before you make your decision. This process alone will help you see that hiring a brokerage in Boston to sell a business in Munich is not as crazy as it may have initially sounded.
From my rural redoubt in Virginia, USA, I have helped business owners in, among other places, Brussels, Belgium, the UAE, Lima, Peru, Melbourne, Australia, Tel Aviv and Singapore, as well as throughout the United States. And now that we have people from all over the world enrolling in our online course on how to become a business broker, any inquiries we receive from anywhere in the world are referred to any broker in that area that has completed the course.
Our course, The “How-To” of Becoming a Business Broker”, teaches how to value businesses and how to educate the business owner the value of hiring a professional business broker. Learn more…
Become a Professional Business Broker…
The Bottom Line
Selling a business takes knowledge, time and talent. The larger or more complex the business is, the more of each of those characteristics will be required.
But the key to success is to have an experienced professional business broker running point for the owner. Such a professional has the knowledge, will save the owner time and can coordinate the talent to serve the best interests of the owner.
Think about this. Most home-sellers know all about the process of selling a home but they almost universally hire professionals to handle the process. There are tons of houses being sold, tons of home-buyers in the market place and tons of credentialed real estate brokers facilitating those transactions. If you would use a real estate agent to sell you house, logic would suggest that you would use a business broker for the FAR more intricate and challenging process of selling your business.
This ain’t rocket science, Bucko. For the experienced broker, it’s neither difficult nor complex; it’s what we professionals do, day in and day out. Put a good broker to work. The right one will save you time, aggravation and money.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
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