We would like to announce the launch of our new blog dedicated to business sellers. You will find extensive information about the business sale process as well as tips and tricks to sell your business to the right buyer with minimum hustle. If you are selling your business you can also check related articles in this blog.
We hope our blogs will answer your questions.
Many business owners think that selling a business is like selling a house. They put a price on the business that they think it is worth, they increase it to have room for negotiation and they start looking for buyers. If a buyer comes with an offer, they negotiate to the last penny to get the maximum price. A motivated buyer facing a lack of information on the business is tempted to reluctantly accept any price and put a conditional offer on the business that satisfies all the seller’s demands. The buyer’s reluctance creates some negative emotions early in the relationship. Naturally, the buyer will put a very broad condition on the offer to protect him/herself. Such Conditions include satisfactory due diligence, buyer satisfaction with the business financial records, tax fillings, profitability, level of sales at his/her own discretion. The buyer is willing to pay the price asked for only if the business matches the perfect image painted by the seller. This very rarely happens. Most businesses are imperfect and most sellers overstate the magnificence of their businesses.
Unfortunately, when the buyer starts his/her due diligence, they discover the imperfections and start having second thoughts. The negative emotions initially developed flourish and the relationship comes to an end. At the end, the seller has wasted tremendous time and effort explaining his/her business to the buyer, the market interprets this failure as a negative signal about the business, which makes it a very hard sell in the future. This is a scenario I have seen frequently as a business broker and I believe it could be avoided.
Selling a business is definitely not like selling a house. After a buyer has seen a house, he/she knows a lot about it, a simple home inspection and some lawyer due diligence can easily show imperfections, so buyers make informed decisions when putting offers. Houses sell much more easily than businesses and don’t stay as long in the market. Businesses on the other hand are much harder to sell and finding the matching buyer takes longer. Furthermore, business buyers are in the dark when they make offers. Because of confidentiality reasons, sellers won’t give away much information about the business before the buyer shows his/her seriousness by putting an offer. For these reasons, negotiating the purchase price for a business should not be very tight. Buyers and sellers should both feel they made a good deal with no hard feelings from any party. This is because the actual sale doesn’t happen at the time of the offer negotiation but happens only after due diligence
When the previous mistakes are made, the result is almost certain: the deal doesn’t close. The seller and buyer have wasted their time, effort, money on lawyers and accountants and the business is not sellable anymore.
Therefore, to be successful in selling your business:
Put a reasonable price on it.
Find the right business broker that your can trust.
Agree with the broker on a commission everybody feels is fair.
Be willing to negotiate with the buyer and understand their perspective.
Give the buyer a realistic picture of your business with no over statement.
Be very cooperative during the due diligence period and help the buyer make the right decision.
Most importantly, be very honest because when selling a business you just can’t fool a buyer.
Business owners consider selling their businesses for many possible reasons:
- Boredom or need for change: This is the most frequent reason (statistically). After starting their businesses from scratch and spending countless hours exploring their ideas and implementing them, business owners simply lose interest in their companies. While this seems hard to believe, most entrepreneurs are more excited in launching a new business than in managing it once it becomes established. Managerial tasks such as accounting, managing people and solving daily problems are not as rewarding as implementing new strategies and growing the business. Many of my clients want to sell their business simply because they want to do something different.
Succession planning/Retiring: The majority of small businesses are heavily dependent on their owners. If something happens to the owner, in most cases the businesses will not survive. When owners approach their retirement age, they need to find successors. While transferring the business to their children seems like the natural decision, this is not always possible for the following reasons:
- Children have other interests than their parent’s business
- There is no consensus in the family about who among the children should take over the business.
- Children don’t have the qualifications, expertise or the talent to manage the business.
- The business needs capital for a new strategic direction: This happens more frequently in consolidating industries. In some mature industries, huge economies of scale are necessary to keep the business afloat. The business could simply not survive in its current size. Ideally, a larger corporation/business would buy the business, merge it with its current operations, suppress some redundant costs and make it more profitable.
- Partnership disputes: Divorces and business partnership disputes are common and could be the reason for selling a profitable business with a lot of potential.
- The business is unprofitable and the owner is not able to turn it around: This is generally not a good reason to sell a business since most business buyers are looking for an income source and very few will look at unprofitable businesses. However, some business people with solid turnaround skills and management expertise are constantly looking for turnaround opportunities. The seller has to prove that the business has potential to become profitable.
It is very important that business owners contemplating selling their businesses spend some time understanding their own motives. Most buyers will become very suspicious if the business seller cannot clearly explain their reasons. If you are considering selling your business, visit our business brokerage website for more information about the business sale process.
One of the main things that deter business owners from selling their businesses themselves is the difficult process of qualifying potential business buyers. Statistics of business sales in North America have shown that only 10% of people actively looking to buy a business end up actually buying a business. This means that 90% of potential buyers never buy a business in their lives. If you are selling your business, out of 10 people who expressed interest in your business 9 will be wasting your time. The remaining one will finally end up buying a business but it might be another one than yours.
With these lousy statistics, most business sellers get discouraged while selling their businesses after spending a lot of their time with tire kickers. Sellers end up concluding that their business will never sell and take it out of the market.
In order to deal with this ordeal, we recommend two possible alternatives:
- List the business with a professional business broker: Competent business brokers know how to qualify business buyers. They will save business sellers’ valuable time and let them focus on the most qualified buyers. Business brokers apply rigorous processes and use their judgment to weed out tire kickers.
- Sellers could qualify business buyers themselves. These are some tips/hints that could help qualify buyers:
- What is the buyer’s motive to buy a business? Is he/she unemployed? How urgent does he/she need to find a business?
- Does the buyer have the necessary funds to purchase? Ask for proof of funds. If the buyer believes he/she will get most of the money from the bank, he/she is probably a dreamer.
- How long has the buyer been looking for a business? A buyer who has been looking for more than 2 years and who hasn’t purchased yet has probably unrealistic expectations and will never buy.
- Has the buyer put an offer on a business before? If yes, this is a good sign. This shows he/she has some readiness to act.
- How analytical is the buyer? Buyers with financial expertise and/or long experience in the corporate world tend to over analyze business opportunities and have hard time making a decision. The small business world is so much different from the corporate world. Business practices learned in the corporate world don’t necessarily apply to small business.
- Does the buyer see him/herself managing the business? This could be learned from the way the buyer talks about the business he/she is contemplating. If the buyer uses “I” frequently, it’s a hint that he has already projected him/herself in the business and there is a high probability he/she makes an offer.
Unfortunately, it will take much more than a few lines to explain the subject of buyer qualification. Most of the knowledge only comes after years of practice acquired in selling different kinds of businesses.
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Most business buyers underestimate how emotions can impact the business purchase process. A lot of money, time and effort is repeatedly wasted on business transactions where buyers and sellers fail to deal with each others’ emotions.
From the seller’s perspective: Business owners have spent a lot of time and energy building their business and when the time comes to sell it, they are generally not emotionally prepared. As often described in business language, their business is their “baby”. They want it to be in the right hands. They want the perfect buyer; the one that will pay the right price, will take care of employees and treat them the same way they were treated before the sale, will grow the business, will honor the seller’s previous engagement, etc. Obviously, this ideal buyer doesn’t exist. As sellers start to realise that the buyer is not ideal, hesitations start coming. Other hesitations usually haunt sellers: What if they are not satisfied with the after sale life? What if they feel lonely, lose their power and status in society?
From the buyer’s perspective: Buying a small business is closer to buying a job than to a purely financial investment. Buyers must love the business to be successful in it. Unlike simply taking a new job, buying a business is irreversible. For these reasons, business buyers live a long period of hesitation before signing the purchase and sale agreement. They are not really sure whether they see themselves managing the business. What if the day to day activity is not what they expected it to be?
It is crucial that business buyers and sellers spend the necessary time to understand each other’s emotions when contemplating a deal. All efforts must be made to nurture a healthy relationship from the beginning to the end. Buyers must understand that business owners are selling their babies and sellers must understand that buyers are making an irrevocable life changing move.
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