Three Popular Myths of Selling A Business
Over the past 38 years our firm has been involved in many discussions with business owners considering the sale of their businesses. There are a few particular myths that have repeatedly surfaced during these discussions.
Since a typical small business owner will sell a business only once in his or her life, it is not surprising that the complexity of the process is often underestimated.
Therefore, an understanding of fact vs. myth is important if an owner of a profitable small business wants to achieve a successful sale and get the best deal the market will bear.
Myth #1 – I Can Sell My Business Myself
Many owners believe they’re qualified to sell their business without professional assistance based on the skills they’ve acquired running their companies. Many owners are entrepreneurs with solid selling skills, and many function as the key salesperson for their company. However, what many don’t anticipate is that selling a business is nothing like selling a product, service or anything else they’ve sold before.
If you’re looking to sell on your own, confidentiality is immediately lost. If word of a potential sale gets out, there are definite risks. What will your competition do if they know you are for sale? They’d probably be yelling the “good news” from the rooftops. You could lose clients, employees and favorable credit terms with banks— not to mention managing potential landlord questions.
Business owners must ask themselves: is there really sufficient time to focus on running and growing the business while compiling marketing materials, advertising, screening a slew of buyers (and tire kickers), and giving tours? On top of all of this, do you have the time and wherewithal to negotiate a fair deal — an adversarial process by nature — plus facilitate due diligence?
When it comes time to sell your business, you should be concentrating your efforts on “the bottom line,” a key issue that matters to prospective buyers, not taking on new challenges.
Article: Why Not Sell on Your Own
Myth #2 – I Know What My Business is Worth
When self-examining the value of their business, some owners want $100,000/year for sweat equity or will base their price on what they personally need for retirement. Others utilize “industry multiples,” most often some nebulous concept of EBITDA. Yet others just pick a number out of the air.
None of these self-derived values will carry credibility with buyers nor will it help a bank provide acquisition funding at closing.
A valuation performed by a company that understands the marketplace of buyers, understands the key factors that drive business value, and has access to private industry databases for national small business sales provides a solid understanding of a company’s market worth, not some vague industry average. It’s surprising, but not uncommon, how many business owners expect a buyer to pay top dollar for their business, yet are not prepared to show them why.
Myth #3 – Selling a Business is Like Selling a House
Preparing to sell a house takes a couple weeks and then word of the sale is spread as far and wide as possible. Once a satisfactory offer is received, the keys are turned over and the seller moves on. No confidentiality, no pre-qualification, no detailed marketing and financial profile, no transition time, no seller note.
A successful business sale requires a great deal of pre-planning, valuation, cash flow recasting, SWOT analysis (strengths, weaknesses, growth opportunities, threats), and buyer evaluation, to name a few.
The average house will sell in less than four months, while the average business sale is nine months to a year.
Even after the business is sold, the seller can be expected to put in at least a few months of transition time, to help the new owner run the business successfully – thereby securing payback on the loan the seller most likely provided the new owner as part of the deal.
Selling a business is complex, to say the least. In fact, Selling a Business is Unlike Anything Else You Can Imagine.
Summary
The environment in which a business must be sold is unique. Therefore, the methods used to sell a business should also be unique. Although the sale of a business is different than the sale of essentially anything else, what occurs is straightforward. It all makes perfectly good sense and is quite logical.
Assume your business is a public company. Before attempting to attract a buyer your board of directors would first engage an investment banker to identify appropriate acquisition candidates, determine the company’s worth, and package your company for presentation to the most attractive and appropriate buyers.
Essentially the same process should be used by small business owners considering a sale. Identify the characteristics of your ideal buyer. Determine what makes your company of value, to whom and for how much. Then decide to sell the company or take other actions that might be deemed more appropriate, such as make the company more attractive and valuable for a future sale.