How much is the business worth?
Who will pay the most money for it?
Can we sell it ourselves?
How much will it cost to retain a business broker?
What real value can a business broker provide?
Should we sell the building with the business?
The answers to these questions and the realities of selling a business to the right buyer for the right price are discussed here. As you will read, a FSBO effort can be successful, but typically is not (fewer than 9% sell at all). The reasons are numerous. The methods employed by professional business brokers described in this document have been developed by the M&A industry over tens of thousands of transactions. They have been proven to yield the quickest sales, best prices, fewest lawsuits and minimize predatory practices.
THE UNKNOWN PART
Your business may be bought by any number of buyers. Your job as a seller is to sell for the best price with the best terms in the shortest time frame. Today, seven (7) buyers may be out there for your business. There could be 15. There could be 0. Tomorrow, the next day, the numbers change. Many buyers are like sellers, they are transient. Many are on the market to buy a business for a short period of time. Some buyers perpetually shop for companies to buy. No one knows who will be ready to buy the day your business goes on the market.
THE COLD UGLY TRUTHS
Who wants to sell your business? Everyone. Your CPA, your attorney, your financial manger may all have merger and acquisition departments that have an appetite to make money from a transaction. Commercial real estate agents sometimes list businesses. Of course, business brokers sell businesses. Who is the best resource to provide this service? Who will work the hardest to find the best buyers? Should you do it in house?
Selling a business is a complicated matter. Anyone who stands to gain from the selling of your business will stand in line to get your commission check. You may want to give your listing to your CPA’s office because you trust them. Don’t do it. You may trust your lawyer’s M&A department. Don’t do it. Interview everyone who will actually do the work. Read this document. Choose a broker by what they do and how they do it, not by who they work for or because they will charge a lower commission. And, do not, if you care about money, sell your business without offering it for sale to the widest market you can access.
As you will see, the cheapest way is often an illusion. Doing it in house is not cheap. Not selling after months of work and waiting is really not cheap. Not selling after months of work, proprietary information disclosure and the loss of employees to the competition is really, really not cheap. Selling in a fashion that leads to liability and litigation is, well, you get the idea.
Here is the ugliest part, grit your teeth.
How much money you have put into your business doesn’t matter. How much you think someone should pay doesn’t matter. What potential you feel your business has doesn’t matter. What you feel your property and building (if you own them) are worth means nothing. The business is worth what cash it can generate. The property will be appraised by comparing it to comparable properties in the area. Your pride, hopes and dreams have no assignable cash value to a buyer.
But, isn’t there a certain type of buyer who would pay more than another for a certain type of business? Yes there is. They are called Strategic Buyers. But before we talk about buyers, let’s talk business valuation, the act of determining value. Putting a correct price tag on a business, and why this can be crucial.
BLUE SKY PRICING
“I’ll sell anything for the right price”. “Everything should always be for sale”. Popular ideas with little basis in the real world. Yes, sometimes people pay more than things are worth. But, it’s usually at an automobile dealership. There is a buyer out there that wants your business, one who will pay the highest dollar for your company. If you’d sell anything for the right price, what is the “right price”? The implication is that the “anything” is not really for sale but if someone wanted to pay more than “anything” is worth, the owner would sell it. P.T. Barnum’s “A sucker is born every minute” is the implication.
This is not to say that a business owner shouldn’t expect to get the highest dollar for their business. Much work and risk goes into owning and growing any business. But, the people and organizations that buy businesses have money, smarts and methodologies. “I’ll sell anything for the right price” is met with “we value businesses based on a 25% capitalization rate. What debt service will your company support?”
It’s not high brow business jargon. It’s the technical question that every business buyer has to answer. In English the question is; “How long will it take us to pay this thing off if we buy it?” The answer is not “for the right price I’ll sell anything”. The answer is a number that works in the equation. 100 different valuation experts can look at your books and all come up with the same number, give or take a few percent.
It’s probably human nature to feel that selling at the best price is done by setting the price high then coming down to a lower price to learn what the market will bear. After all, this strategy has a common thread from corporate board rooms to street bartering in the third world. But this strategy carries with it the concept that you can afford to loose some market share by pricing too high for some buyers. In a limited market, one that may only present a few legitimate buyers, this strategy simply allows deep discounting and prevents many serious buyers from even taking a look at you. The number has to be close to real. We’ll explore this further later on.
There may be a sucker born every minute. A few of them may somehow have found themselves with both money and the desire to buy a business. You may believe your company can find a buyer that belongs to this segment of the populace. It’s possible. But you are competing with ten or twenty thousand “for the right price I’ll sell anything” sellers for those few, rare, gullible buyers.
In the next installment we will look at an analogy of how selling a business relates to the real estate market, consider business valuations and begin a close look at buyers.
