According to a recent Business Brokerage Press study, approximately 75 percent of listed businesses will not sell. In the United States about 2.2 million businesses changed hands last year which means over 6 million listed businesses did not. This is a staggering failure rate. Following are five questions a business owner should ask themselves before listing the business that will help them become part of the 25 percent of successful business sales.
What is the market value of my business?
The most common reason a business does not sell is because it is overpriced. The value of a business is based largely on the earnings it produces for its owner. Sellers often base their selling price on myths or set a price based upon what they need to get out of the business. Unfortunately these methods of pricing do not address what the market will bear.
Properly constructed market valuations or appraisals use various accounting methods. These valuations and appraisals are produced by certified business valuation professionals. A broker's opinion of value produced by a licensed business broker is a low-cost alternative to a certified valuation or appraisal. Regardless of the source, every seller should have some sort of valuation that is defensible to a buyer before listing their business.
Are my terms of the sale reasonable and conventional?
All business owners would like to get all cash for their small business. In days past this was not uncommon. Buyers were able to obtain capital through use of home equity, SBA-backed business opportunity loans and, for the stronger deals, conventional financing from their local banker. Today, most banks have dropped their SBA business opportunity loan programs, equity in homes has evaporated as housing prices dropped and banks are not lending for small business acquisitions. Out of necessity, seller carry-back financing is emerging as the No. 1 way to finance a business acquisition. In other words, The Bank of Sellers is now open for business.
The terms a seller extends to a buyer will have a significant impact on the ultimate sold price. According to a recent trade study, for a properly marketed business a 33 percent cash down payment from the buyer with the remainder carried back by the seller can drive a 25 percent increase in the sale price of the business and this deal structure can result in a 90 percent close percentage. Conversely, if the buyer offers to pay 100 percent cash for the business the seller can expect to reduce their price by up to 50 percent and they should expect a less than 4 percent chance of closing this deal.
Are my books accurate and complete?
One of the biggest concerns a buyer has when purchasing a business is whether or not the financial information provided by the seller is accurate and complete. If they do not believe the books they will not buy. A seller should be prepared to share their last three years of profit and loss statements corresponding to their IRS tax year and an interim profit and loss statement that is not older that two months. In addition, an accurate, current balance sheet will be required.
Before the business is listed a seller should be prepared to provide these financial reports. The profit and loss reports should track very closely to the company's federal tax returns which will also have to be produced for the buyer before closing. The financial reports should be produced by an accounting firm, not by a bookkeeper. A seller should be very familiar with the numbers as these reports will be scrutinized by the buyer's accountant.
Who can buy my business?
Most small business owners work in their business because it is their job. But working in their business as opposed to working on their business can make it a very difficult to sell. If the seller is the only one in the business who can operate an essential, sophisticated piece of machinery, or the only one who can sell their products to their top clients, then they are severely limiting the number of buyers who can buy their business. A seller should constantly be looking for ways to delegate as much of the day-to-day operation of the business to others so that the business is not dependent upon their direct hour-by-hour involvement.
Most buyers who want to own businesses have had some level of management experience in their background. They will be seeking a business that they can learn quickly to manage, not operate.
Do I have the right advisors on board?
Business sales involve negotiated offer contracts, due-diligence investigations, financial statement analysis, tax return analysis, promissory notes, lien searches, funds handling and more. Before the business is placed on the market the seller should find a qualified and experienced attorney and accountant to assist them in the sale. They should also consider using a licensed business broker to help determine the market value of the business, to package and market the business and negotiate the sale price on the seller's behalf. The early and ongoing involvement by a professional who specializes in business sale transactions may dramatically increase sales proceeds and minimize pressure.
Selling a business may be the biggest transaction in a small business owner's life. With proper preparation, a thorough understanding of the sale process, and a professional support team a seller can positively impact the sale and therefore maximize the outcome.
Dennis Grundy is a principal of Murphy Business Brokerage in Reno. Contact him at d.grundy@murphybusiness.com or 850-5835.
