The statistics on businesses sold in California are well worth knowing. Over 70% of all businesses on the market, are not sold. Why is this?
The two strongest reasons for failure are lack of preparation and an unrealistic selling price. Valuing a business correctly tends to resolve the unrealistic selling price problem. Know when to hold the price and when to change the price also helps businesses sell quicker. But, what about the preparation points?
Lets discuss the various factors that can help you get fully prepared when selling your business.
The decision to sell – People decide to sell their businesses for many different reasons. My experience shows that the main reason is because of a failed goal or purpose, of some sort. Sellers are not happy when he or she has not been making it to their satisfaction or their original goal has not being achieved. Another truly legitimate reason is if a business owner’s health is going down hill. Lastly, sometimes it is just time to retire, and play golf or travel. Whatever your reason, it is important to identify exactly what the reason is that you want to sell your business, and to be totally honest with yourself and others on this point. The reason you might be selling does not adversely affect the selling price, but it may help the marketing activities, for the agent and make the final negotiations go easier. People really like to understand why a seller wants to get out, and they are perceptive if you are lying on that point.
How to sell it – The next part of being prepared, is to make the decision to “sell it yourself,” or use a business broker. The main advantage in selling the business yourself is that you save on the commission. Brokers, usually charge 10% of the sales price for businesses priced at less than $1 Million Dollars. This can seem like a lot of money but it isn’t. If you do the marketing yourself, you would have to cover all cost of advertising the business and take all the time necessary to talk to every inquiry. Have you looked at what an add costs in the Los Angeles Times? Imagine putting in an advertisement every week for 6 months. You could take your wife on a first class cruise around the world for that much money. (Sorry Norman Chandler.)
The advantages in using a broker are many. Brokers have established marketing lines that allow them to offer your business to lots of people, in a short period of time. They know the market and are well versed in all the potential pitfalls involved in selling a business. They handle all costs associated with marketing and packaging the business and they are only paid if and when the business sells. No legitimate brokerage asks for upfront fees. You need to decide, are you going to sell it yourself or use a competent broker? I did say a competent broker; there are both good and bad brokers as in any business.
Who you should not try selling it to – When people think about selling their business, they often think of selling it to their competitors or employees. This is actually not a good idea. A competitor’s value of your business is based entirely on advantages they would be achieving, if you were not in business and therefore not hindering the expansion of their business. They look at what the net effect would be if they owned your resources (clients, territories, inventories, etc.)
Also, competitors historically are only willing to buy a similar business, for 20-33% of the price that an outsider would pay for your business. This is because the insider knows the headaches of your business and discounts the price because of them. Also many competitors will appear to be interested in buying your business, as a way to find out trade secrets. Many times they never had any real interest in buying your business at all.
Employees, when buying a business from their employer do like the idea of all the perks of ownership, but in truth, they do not like the responsibilities and potential liabilities that come with ownership. A really big problem is when employees know that a business is for sale; they usually start looking around for a new employer. I really cannot say this strongly enough. When selling your business, it is not a good idea to go to your competitors and / or employees, as a starting point.
Things that will help with the sale – A part of being prepared is to have your accounting records up to date, available and complete. This will make it much easier to get started on selling the business and to close a deal quicker. Try to put together the following before you start;
a) 2 years of profit and loss statements for the business
b) The most recent twelve to eighteen months of sales – listed by month
c) List of all equipment, with estimated market value as used equipment in place, not at fire sale prices.
d) Current list of inventories – if any
e) Copies of any property lease, equipment leases and other business related documents, such as current health department certificate as in the case of a restaurant, or OSHA spray booth permit.
f) List of all perks you personally get out of the business (these, added back into the financial reports, increase the profit figures for the business, thereby making the business more valuable).
g) A brief description of the business; what it does; the area it covers and the future expansion possibilities.
Changing the way you keep your accounting records – If you are one of the few people who do not keep accurate books, then today is the day to change your record keeping. If you are writing off everything in the world against your business, you do not need to change that action in order to sell your business. Just be able to pick out those items that a buyer wouldn’t incur if they bought the business and be able to give this information to a buyer or broker. The more important change that is needed is to take 100% of all sales and services and get them deposited in the bank and recorded as sales. If you are unwilling to do this for tax reasons, I understand. This is critical to getting the highest price. Declaring all your income, also allows you to sleep better, knowing that you are keeping books that you can show any buyer or any government official. If you feel that recording all income will also raise your income taxes, then stop worrying. There are some very good accountants around who know how to save taxes legally. If you cannot find one, I will find one for you.
Negotiation and flexibility – One of the reasons some brokers are worth their weight in gold, is because they are very good at negotiation and know how to create win-win situations. They keep the parties talking and know how to work the offers until the business is sold. You should be prepared to be flexible while negotiating the sale of your business, also. Do not for example insist on ‘all-cash for the business and nothing else’. This sort of inflexible approach will usually kill a deal before it gets started. Also, let your broker do his or her job; do not discuss price and terms with prospective buyers directly. Let your broker know what points you are willing to negotiate and which you are not, in advance of getting offers. This will help to get more offers.
Most of all you want to do everything you can to make sure a deal to sell your business is concluded as quickly as possible. There is a law with regard to selling a business. “The more time that passes, the harder it is to sell a business, and the easier it is for a business deal to fall apart.” So, do what you can to expedite the sale of your business and work with your broker.