Author: Barbara Kline
Your business is an asset. You’ve worked hard and long and are proud of the results. But now it is time to move on. You start thinking about how much you want for it, and you start thinking about potential buyers. This should be easy, right? No need to give up a percentage of the sale price to a business broker. Well, possibly. But most successful real estate brokers will tell you that some of their best clients are the ones they approached when the seller had a “For Sale Buy Owner” sign posted on the property. Business brokers will tell you the same thing. Selling a property or a business is not as simple as it looks.
Selling a business requires a different skill set from running a business
You know how to sell your product or service, but it takes a different skill set to sell your business.
- You may know how much you think it is worth, but how do you justify it to someone who doesn’t know it the way you do?
- How do you find buyers while keeping your intent a secret? Your business can be hurt if employees, customers or vendors learn that it is on the market.
- How do you find time to focus on selling the business when you still need to run it? A business sale is a time-intensive proposition, even after you have identified and qualified a potential buyer. You can’t let the business slide while you are looking for a buyer—it will affect valuation.
Unlike real estate, or buying a car, or buying any number of high ticket manufactured products, there are rarely viable comparables for small businesses. Two businesses selling the same type of product next to each other on the same street in similar sized buildings may be sold at very different prices. Why? Product quality or design may differ. One company may sell opportunistically to any buyer that comes along where the other may emphasize long-term relationships and repeat sales. Productivity rates per employee will vary. Management styles will definitely vary. The ratio of net operating income to gross revenues will be different. And, perhaps most importantly, the reasons a buyer has for purchasing the business and the amount of cash available for the purchase will have a major impact on the final outcome.
Business brokers make a career of understanding the dynamics of a business sale and can have the resources to effectively evaluate and position a business, find potential buyers and facilitate the due diligence process necessary to create a win/win environment for the sale.
Selling a business for the optimum price takes planning – not a couple of weeks or months, but a 2-3 years
The first two things that just about any buyer looks at when deciding if he wants more information tare net operating income and the ratio of net operating income to gross revenues. He also wants to see how the business is trending, which means 3 or more complete years of financial reporting, plus a growth in owner equity on the Balance Sheet.
Most buyers are much less emotional about purchasing a business than entrepreneurs are about starting one. An entrepreneur has a dream and can often be overly optimistic as to the possibilities and the time it will take to reach profitability goals. Not to mention that way more than half of all new businesses fail within the first 5 years. A buyer is looking for an business that is established, with a good track record, and with cash flow to cover operating expenses, a return on investment, loan payments for purchasing of the business, and, often, a salary. If the risk is too high, there is no benefit to paying a premium to buy versus simply starting a new business. Bottom line: The better your financials look, the easier it is to sell your business in the time frame and at the price point you are targeting.
Take a look at your P&L statement and determine what you can do to improve the bottom line—better customer service, improved quality control, tightened purchasing controls, etc. Many small business owners and their financial advisors aim for the smallest possible profits for tax purposes and use expensive company cars, part-time family member employees, large home office allowances and other tactics to keep paper income low. These elective expenses can be added back to show an “adjusted cash flow to owner,” but too big a discrepancy can be a red flag to many buyers.
Your Business Is One of Your Most Valuable Assets—Don’t Squander It!
There is a tendency for small business owners to treat their businesses as jobs where they are their own boss. Michael Gerber (The E-Myth Revisited) outlines the reasons for and pitfalls inherent in this kind of perspective. In essence, the entrepreneur following a passion may focus more on enjoying the passion and bringing in enough to live on rather than building a structure that will allow the business to grow and force the entrepreneur or a manager hired by the entrepreneur to focus on the mechanics of the business (i.e. “on the business”) rather than simply work “in the business.”
The time when the business owner usually figures this out is when she thinks she wants to sell and discovers that there are few (or no) assets other than she herself. All that time and energy should be an investment that will yield a nest egg for retirement or future enterprises. I encourage you to take a good look at your long-term goals for your business and start planning now to safeguard your investment. A side benefit is more profitability today (and that’s not a bad side benefit!).
Also, keep an eye out for a business broker you want to work with when the time comes to sell. You’ll be glad of the expert help in finding and vetting a buyer and establishing the relationship of trust necessary to ensure a successful outcome.
Reach out to me for a free hour consultation on how you as a business owner can plan today to make sure that you reap the full rewards of your business tomorrow.
About
I help people achieve their business objectives by optimizing their long-term investment in a business or in commercial real estate. Whether looking for your first location, upsizing, downsizing, or preparing to sell their business, I am available to help you meet your objectives and realize your dreams.
Reach out to me for a free hour consultation on how you as a business owner can plan today to make sure that you reap the full rewards of your business tomorrow.
Barbara Kline
Associate Broker/Certified Business Broker
