15 Oct Selling Your Business In Today’s Robust Market
by Glen Cooper, Carolyn Ryan & Scott Perry
Selling a business is complicated.
You can take control of the process, however, by learning what to do.
All three of us are full-time business brokers and business coaches for small businesses. We’ve learned many lessons. In this article, we write about how to make it happen.
We know how it SHOULD BE DONE.
We know how you WANT IT DONE.
We know how it REALLY GETS DONE!
Understanding these three aspects of the process and bringing them into alignment is the key to making it all work.
Over the years, Glen has written a lot on this subject. The first time was in the early 1980s when he started being a business broker.
Now, in 2018, we all have just re-written this content to bring it all up-to-date. The small business selling market is now robust again. 2008-2013 was way down, but we have had good growth in the activity level since 2013, and 2017 was a record year.
The subject of selling your business can be broken down into five parts:
- Part 1. Today’s Market
- Part 2. Six Steps of Selling a Busines
- Part 3. Questions to Ask a Business Broker
- Part 4. Surprises You Can Expect
- Part 5. After the Sale
The small business selling market across the U.S. is similar state by state, and our comments on the subject will apply to most situations.
Any student of historical trends can easily believe that today is the most interesting time in all human history.
Because of a unique alignment of causal effects, it is a great time to either start AND/OR buy a business – as well as a great time to sell one!
It’s a great time to buy because there are so many Baby Boomers needing to sell. It’s a time to sell because there are so many younger buyers in the market eager and able to make a big difference.
Uncertainty creates opportunity. Times like these create tomorrow’s business legends. We are right in the midst of the changes that will be tomorrow’s “best thing that ever happened to us.”
It is unlike any previous time because:
- Generational shifts are changing the way businesses work,
- A very competitive economy is causing a worldwide power structure re-mix, and
- Scientific and technological breakthroughs are revolutionizing life as we know it.
A retiring business owner in the United States, (we’ll call him John) sells his business because he has a unique opportunity to move and start a whole new life that he didn’t expect.
His business is bought by a young couple who have been traveling overseas for several years.
The whole thing is financed with a local bank and SBA guaranty, under new and more aggressive lending rules, and with the help of seller financing that will actually save John taxes on his business-sale proceeds.
The young couple buying John’s business is moving to his area for environmental and family reasons. They love Colorado!
They know how to take John’s business to a completely different level better than John does. They will create a new, interactive, multi-level Internet-based campaign for selling John’s product and service worldwide to a niche market.
John’s oldest daughter is a successful executive in a biogenetics firm. She is now quite well-off and is buying mom and dad a separate home near her own.
John is relieved. He will now be free of worry about workers, electronics or “social networking” he no longer understands.
Time to Get Going!
All of this is what I mean by generational shifts and new opportunities fueled by technology. It’s truly a whole new business buying and selling market.
Business buyers have always been younger than business sellers, but today, it makes a bigger difference.
Generation Xers (and even Millennials now!) are changing how business is done because they have new tools: new analytic tools, new communications tools and new collaborative tools.
Playing computer games all those years, it turns out, has the potential of making you an excellent global resource manager.
Recent economic turmoil caused a dip in the prices of some businesses. But, surprise of surprises, even that low-tech business now looks pretty good.
It looks good because it’s located in a steady, safe and friendly local community. It looks good because it offers a better return on investment than elsewhere. It looks good because it offers a great lifestyle.
Banks are actually now back into the lending markets for small businesses. The SBA has become more aggressive in their guarantees. Recently, some alternative “crowd funding” alternatives have also developed. At the small business level, it’s still mostly seller-based financing. But, now, we have some choices too!
Some of today’s “right deals” are brand new businesses founded on new technologies. But just as many are older businesses given new life with that same new technology. Targeting niche markets has never been easier.
If there are as few as only 1,000 people worldwide that want something, that small number of people can be a great business market for someone who sees their unique need. Technology is also creating unique needs.
As we have on-going conversations with hundreds of business buyer prospects, we are constantly reminded why people buy businesses here: if they do, they get to live here!
Almost anywhere in the U.S. is a great place to buy a business. The United States is physically, socially, politically and economically as safe as anywhere else on earth! It’s also mostly a four-season climate and an environment of great beauty, offering many different lifestyle choices. And, within the U.S., Colorado is one very impressive stand-out!
Other places in the world may be shaky, but things still work here. Our economic infrastructure is known to be one of the best in the world. Who wouldn’t want what we have?
Six Steps of Selling a Business
Selling a business can be broken down into six steps:
- Form Your Team – Business Broker, CPA, Lawyer, Wealth Advisor
- Price It Right – Don’t Forget that Terms Are Everything
- Prepare a Package – Do Your Homework First
- Target Prospects – Tell Only the Right Types of Prospects
- Negotiate Professionally – Use Your Team!
- Wrap It Up Quickly – Get to the Closing on Time
Let’s look at an example. It’s a favorite of Glen’s because it illustrates all the points, and the seller gave us permission to use his story.
The story seems unique in some ways until you see that it’s not that unique in so many other ways. The many problems that one seller encounters continue to repeat themselves endlessly – over and over again!
The technology of how people communicate marches ahead. The basic human stuff remains the same.
In 2016, Glen sold the Denver Folklore Center. The seller was Harry Tuft. Harry, at 80 years of age, was an active musician (and still is today). He founded this business in 1962!
In some ways, it was just a music store. Even an old-fashioned one! The store had old décor that hadn’t been changed in 20+ years. And, now, this business found itself in a world where most people buy their music online.
Now, Harry’s store did have some special features. It had a following from years in the business and a strong association with the founding of Swallow Hill, an historic music venue nearby. The business also had the franchises to sell two of the most prominent international brands of guitars – Martin and Taylor – as well as eleven other acoustic instrument brand names. The store specialized in acoustic instruments, not electronic.
The good news about having those franchises was that he had about $900,000 in annual gross sales. The bad news was that he was no longer making much money. Lots of local competition was still in place and the Internet sales of music and musical instruments was eroding what was left.
Because it was still a vital store in many people’s eyes – and especially among his friends and colleagues – he had been approached by several of them to buy his business. In fact, they were sincere and had begun to make him offers.
Harry Tuft, however, was a pretty savvy business owner in one very important way – he knew that there was a lot he didn’t know! He knew better than to try to sell it himself. Especially to his friends.
He actually understood that, in business, you need to listen to good advice, understand the value of whatever you sell, present what you’re selling professionally, understand who your real customers are, hire good help, and never make your customer wait.
So, even though he thought that his friends might actually buy the place, he wanted to take a professional approach. He asked around and talked to his accountant, his lawyer, a business appraiser and some of his other friends that he thought would give him good business advice.
In that process, he found Glen. Glen was recommended by a member of a business owner networking group that Harry attended. He then met Glen, and the rest is history.
Form Your Team
So, it all starts with teamwork. Harry needed to form his team of professionals, then listen to them. And, he did just that! His CPA, lawyer, appraiser and his business networking group provided the key lead he needed – the referral of a business broker to manage the process. His team was complete.
Your team can include a business broker, lawyer, accountant and any other personal business advisor you rely upon. This team provides checks and balances to help you keep the process on track. Your team members may have to be from your area’s largest city, but rarely need to be farther away than that. Every urban area in the U.S. has many such good advisors.
Technology will eventually make it practical and affordable to assemble advisors from around the world that you know you can trust. But today, forming your team is most likely a local activity. You want to be able to talk face-to-face with each of them.
Price It Right
The first team task is to value the business. Pricing your business, however, may be more difficult than you expect. Your accountant and attorney may not have valuation expertise. None of your team members will want to appear too pessimistic about the price of your business.
Harry hired a business appraiser. It was probably the only thing he did that he didn’t really need to do, however. Most competent brokers offer a valuation opinion as part of their services.
This is, however, a time for active listening. If your team agrees upon the price and terms, that’s great. If they don’t, look for suggestions from the team on ways to resolve the issue.
Harry’s appraiser gave him a confusing answer. She was a financial analyst without small business valuation credentials. So, the price range she gave him didn’t seem quite right, even to Harry. It seemed way too low.
Luckily, the appraiser was just concluding her report as Glen was just meeting Harry, so Glen, as a business broker (and former appraiser), was able to give him a second opinion that made more sense to Harry. Yes, it was more aggressive, but Glen was able to explain it well.
Glen was also able to show Harry just how a business broker defends the value of a seller client’s business all through the six steps of selling.
Prepare a Package
Buyer prospects expect a great deal of information. This means you should develop a sales presentation package to summarize your business story and supporting data. This is the broker’s job, but you may choose to have it reviewed by your other advisors before it is given to any potential buyers.
Prospects expect you to present a thorough explanation of your business and the markets it serves, as well as historic and current financial statements.
A sales presentation package, alternatively called an “offering summary,” an “offering memorandum,” a “prospectus,” or “confidential business review,” is ideally prepared by the broker and reviewed by you, the seller. It tells the story of your business in words, pictures and in numbers.
It is critical for both of you to have a mutual understanding of the facts and issues. Creating the package prepares each of you – the seller and the broker – for the required sales effort.
As it turned out, Harry had a very special story to tell, wonderful photos and at least the sales figures were promising of a future profit if the way the store was run got changed a bit.
The next step – finding the right buyer – is the broker’s job. Working with a well-managed database of prospects is how effective business brokers get the job done.
But, in this case, too, there were friends of Harry that needed to be considered and dealt with diplomatically.
Qualified, serious buyer prospects (companies and individuals) register with business brokers in geographic areas where they expect to find business acquisition opportunities.
Targeting and qualifying prospective buyers is a painstaking process. Maintaining lists and working with prospects is critical.
An amazing thing to learn for a seller is that buyer prospects who are prepared and capable of actually buying a business are usually already looking. Most are already working with a broker.
If someone hasn’t yet taken steps to search for a business to buy, they are probably still months or years from actually scraping together the money, courage and information needed to take that step.
Curiosity and uncertainty usually require that business buyer prospects will take many early, yet very slow, steps toward that decision. For most, it’s something they’ve never done before. The learning curve is longer than anyone thinks at the beginning of their journey.
Business brokers who work every day with self-identified buyer prospects know that 98% or more never move ahead to actually buy a business.
Of the small number that does, it usually takes a year or so of active searching and learning about the process before they settle into a purchase decision.
That’s why hiring a broker who already has buyer prospects in the pipeline makes sense. They may be ready to buy sooner rather than later. Catching a buyer at the end of their search is best.
In Harry’s case, Glen recognized immediately that Harry’s friends were possible buyers, but only if they had the money and/or the ability to get financed.
Harry’s friends had been looking at his business for about a year. They appeared to be serious. Glen met with the key persons in the group and personally presented the Offering Summary that he had prepared. In fact, the version Glen showed them was written specifically for them as ideal buyer prospects.
The key to how it was prepared was that it outlined and explained the price that Glen thought the business was worth and showed them what kinds of funds would be needed to make this happen. It made Harry’s friends realize that Harry was serious and now on the active market and it defined in a surprising way what they could do to make it happen for them.
When you finally get an interested and qualified prospect who you believe is right for your business, plan your negotiation strategy carefully, but always negotiate in good faith. Remember that your goal is to sell your business.
Lay the foundation for the team effort that you and the buyer will need to get to a closing (sale completion), and then to have a successful transition in the months that follow. Harry was exemplary in following this advice.
Over a few months, Glen identified 24 potential prospects for Harry’s business. Of those, twelve were qualified and interested enough to receive an offering summary. Only three, however, pursued it further. In the end, the offer accepted was from two highly skilled buyer prospects who Harry believed would be an excellent fit for his business.
Those types of ratios – 100% of the inquiries leading to a 50% response rate, then less than 10% who actually move forward to serious consideration, finally yielding 2% who actually buy– are typical for how the process really works.
As the old saying goes, “You have to kiss a lot of frogs to find a prince.” Business brokers kiss a lot of frogs for their clients!
As it turned out, these two were among the group of “Harry’s friends.” But, it helped to motivate them into action by launching the sales effort that brought others to the table as well.
Wrap It Up Quickly
Even the best buyer prospects, however, can change their minds overnight. When someone is ready to make a commitment, our advice is to get it in writing as soon as possible.
After the initial agreement is signed, close as quickly as possible.
Harry’s business was sold using the services of experienced local professionals on each side. Glen met several times with all the parties and kept the timeline as short as possible.
It’s not always the broker’s job to coordinate the sale at closing, but somebody needs to be in charge of seeing that it is as efficient as possible.
Today, Harry is retired, but still singing in concert. You can frequently see him at Swallow Hill. He also teaches and holds workshops for his many students and fans.
Questions to Ask A Business Broker
Even in robust times like these, all small business owners should occasionally ask themselves: Do I want to continue my business, or do I want to sell? If I plan to sell within the next few years, is there anything I should do right now?
Who do I call? Which business broker? Who else needs to know? Where do I begin?
For most prospective business sellers, this business selling exercise is a confusing, first-time experience.
It is wise to begin slowly as you form your team. Interviewing a business broker might be the best start. Business brokers don’t charge by the hour, so it costs nothing to get their initial advice first. A one-hour meeting can be very productive.
First Meeting With Your Broker
At your first interview, we business brokers expect you to ask us what your business is worth. We may offer a quick, free estimate of your potential business value if we can review the last few years of tax returns or financial statements.
Not all business brokers will do this free of charge. Not all businesses can be valued so quickly, even by a pro. Sometimes it takes 15 minutes. Sometimes it takes 15 hours! If it takes more than a few minutes, there might be a charge. A broker who has no business appraisal background may recommend a third-party appraiser.
Confidentiality is important and business brokers understand this. The material you give to business brokers is treated as highly confidential.
Your business broker will have many more detailed, analytical questions about your business when you commit to proceed with a sales offering.
Business brokers expect you to ask lots of questions about the process. How much time does it take to sell a business? What steps are involved? How does a business broker solicit potential buyers and still preserve confidentiality?
A business broker is the advisor you will spend the most time with when you finally decide to sell.
Your business broker must be an experienced financial analyst, a skilled business valuator, an effective planner, a savvy sales professional and a seasoned negotiator.
The individual you choose will be the primary actor in your sales effort.
Even in a larger firm with multiple business brokers, any given business-for-sale usually only commands the time of one individual broker.
In our firm, we “double team” it. We believe that one plus one equals three. Clients get a lot more attention and a deeper well of expertise when at least two brokers are at their service.
Some other brokers have adopted this collaborative approach, with at least two brokers involved in each business sale, but that is the exception in the world of business brokers, not the rule. If only one broker shows up to list your business, then you’re only getting one broker.
Finally, check out your business broker. All business brokers will agree to come meet with you, but do some research first.
Look for them online. Do they have a website? Are they on LinkedIn? Do you like what you see?
Getting referrals from your other advisors is also a great idea. But, after you narrow the list to a few that seem likely, start with the one you think is the best, and see that broker first.
Meet the business broker in a space where you can get to know him or her as a person. Be sure it’s a place where you are comfortable talking out loud, candidly and confidentially about the prospect of selling your business.
Meet for a meal, go to the broker’s office or home, welcome the broker to yours – whatever it takes to verify that the person you are choosing for your broker is a person who will wear well with you over time.
Questions Suggested by Inc. Magazine
Many people have suggested questions to ask a business broker at the first meeting. One list that stands the test of time comes from Inc. magazine writer Carole Matthews:
1 What is your background and experience? Matthews quotes prominent Texas business broker Jeff Jones as pointing out that the average business broker is 55 years old, and for good reason. Experience counts!
“It takes time,” Jones says, “to understand the nuances of business. A competent broker needs to know about valuation, accounting, law, sales and . . . patience!”
Don’t be shy about asking your broker what experience they have in these areas.
2 Are you a member of a professional association? Matthews points out that business brokers should have the right connections.
Business brokers have a professional association, the International Business Brokers Association (IBBA), and most states have their own IBBA affiliate.
Our affiliate is the Colorado Association of Business Intermediaries (CABI) (www.ColoradoBusinesses.com). Is your Colorado broker a member? Check out their website for the list of members.
Look for a business broker who stays current on new developments and in touch with other professionals within the industry.
3 What services do you provide? Matthews article urges sellers to carefully review the services offered by various business brokers. “Remember that you are hiring a sales professional with strong financial skills, so look for signs that your broker is just that.”
Business brokers also help value a business, create the selling narrative, market it, screen buyers, maintain confidentiality and negotiate the final deal terms. Find a broker who can explain these aspects of their service.
Two mistakes often made are equating business brokers with real estate brokers and over estimating the capabilities of national brokers in comparison with local ones.
Real estate and business brokers are not the same. Real estate brokers don’t have systems to protect a business seller’s confidentiality. They often represent buyers, which complicates a business sale. They rarely understand the nuances of a business sale, especially intangible business values.
A skilled local business broker can usually offer much better service than a national or out of state broker. And, in most states, there are many skilled brokers. There is no need to hire an out-of-state broker.
Will you be able to meet face-to-face with your broker when you need to? That’s a key question.
4 Can I talk to the owner? This is not as hard as you might think. As many as 45% of business brokers are sole practitioners. In those cases, you’re already talking to the owner!
And most business brokerage firms have only a handful of agents, so reaching the owner should not be a problem. Ask the same questions of the owner as you have of the broker, to be sure their answers are the same.
We would guess that you won’t be able to find the owners of the national firms. IBBA founder Tom West is right when he gives the advice in the Inc. article to “cross that firm off your list,” if you can’t reach the owner.
Every legitimate business brokerage firm in the country has an owner who is actively engaged in the field and who will talk directly to any potential client. It might even be best to go meet them in person!
5 What kind of tools do you use to research buyers? is Matthews’ original question. We would rephrase it to say How do you screen and pre-qualify buyers? The Internet has recently made the world a much smaller and accessible place for business sellers. The difficult part is not how to get buyer prospects to respond, but how to manage them after they do.
Managing “buyer flow” to protect a seller’s confidentiality requires a system.
A seller needs to know something about the buyer prospects who are receiving confidential information about their business! Buyer prospects need to be screened and pre-qualified.
When a buyer prospect is not willing to follow the process toward protecting the seller’s confidentiality, brokers need to have procedures in place to stop the flow of information until the process is followed.
Fewer than two in 100 business buyer inquirers who respond to your marketing effort will ever actually buy a business! That means, on average, to get one real buyer, you and your broker need to eliminate at least 98 others! This is why it takes a system.
6 How will you market my business? The business broker you want to hire will be able to show you their online marketing strategy and platforms. They will have printed and/or digitized materials to show you, and they will be happy to explain their unique marketing approach.
“Discovering what tools a firm has in its marketing arsenal will help you determine just how committed they are to selling,” according to Matthews.
7 Can you provide us with referrals? This is a bonus question that we add to Matthews’ list. When in doubt, check references, whether they are from within the industry or are from the among the broker’s past seller clients. Is their experience consistent with what the broker has said?
Even if you don’t actually call all of the references, you should still ask for them. Just observing how the broker provides the list of references can be informative.
A seller should be able to get specific answers from a competent business broker. And references are the single best source for checking if those answers are true.
Surprises You Can Expect
There are at least five things you probably don’t know about selling your business that will surprise you:
- The price and terms you start with won’t be what you end with.
- You are the one most likely to breach your own confidentiality.
- You have only a 20% chance to sell your business in the first year.
- You have only a 2% chance to sell to any one buyer prospect.
- Money should be the least of your worries during this process.
How can we prove these statements? Well, we can’t PROVE them.
You see, in private business transactions, no one has an interest in keeping records of failures, problems, surprises, worries and embarrassments.
Private and public business sale records are only about successful transactions. Sales get recorded, but not businesses that fail to sell.
Problems, surprises and worries that have been experienced by those before you rarely get passed along. What’s embarrassing is conveniently forgotten.
The only way you can take the pain out of these and other surprises is by talking to those of us who have practiced long enough to help you avoid them, or at least minimize their impact.
What you need is a professional from a firm with effective systems, experienced team members and a good track record.
The team (business broker, business lawyer, CPA, financial advisor and the firms behind them) should have the combined skills to correctly estimate and defend the value of your business, to protect your confidentiality, create top quality marketing materials, screen and qualify both personal and corporate buyer prospects, and get you through speedy negotiations to a satisfactory closing and then beyond to whatever future you have planned.
Neither we, nor anyone else, can make any money by gathering and publishing information about things you don’t really want to know or about costly surprises that await you. No one wants to pay for bad news.
But, we business brokers are at our professional “best” when we tell you the truth, and when we collaborate with you by being transparent and accessible.
So, with that in mind, here are our explanations of the five likely surprises:
The Starting Price & Terms Won’t Be the Ending Price & Terms
The price that your business can command on the market is actually more predictable today than ever before, but that is entirely counter-intuitive.
You may think that market data points from before the last recession are completely wrong and that data points from the last recession are also no longer applicable. But, you’d be wrong.
Small business pricing rules of thumb are based upon the ratios of selling price to sales volume and/or profits. For example, a small business might be said to be worth a certain percentage of its annual sales and/or a certain multiple of its annual profits. Determining the fair market value of a small business based upon such ratios is common.
The business selling market changes. Sales can go up or down and the business profits may be growing or shrinking, but the ratios of small business sales prices to that business’ annual sales and/or profits are remarkably stable over time for most small businesses.
The information of what businesses sell for at all size levels is much better than it used to be, but sellers are still largely unaware – or in denial – about the realities of price and terms. The most recent recession (technically 2007-2009) actually reinforced the principals of business valuation.
Almost everyone is baffled by the business appraisal process because it is both science and art. Rules of thumb offered by brokers, in trade journals and online are often confusing, sometimes even wrong, and nearly always misunderstood by general readers.
There are, however, several online databases now, with over 75,000 business sale transactions showing what businesses sell for.
In aggregate, they show that most owner operated businesses sell from as little as 1 times annual “cash flow to the owner” to as much as 4 times cash flow. But beware! The average business in this “under-$5 million-in-gross-sales” category sells for only about 2.2 times cash flow to the owner, not including real estate and inventory for resale. That has not changed for years.
Sellers don’t seek out this data, but buyer prospects do.
In this brief article, we cannot teach business appraisal. We have written extensively about this already, and will write more as new data comes in.
The topic is also covered in other articles we provide to our seller clients and which can also be found on our website, www.ColoradoBusinessBrokers.co.
The most common rule of thumb used to estimate what a small business will sell for (of the kind and type we would have as a client of ours) is about three times annual owner cash flow. The businesses that we sell are often larger or “better than average” businesses, so the multiple of cash flow can occasionally be more.
If you think that a 3x multiple is way too low, it’s probably because what you read is usually about larger companies.
In that case, you’ve probably heard a figure like 5-7 times earnings, or, in public companies, P/E (Price/Earnings) ratios of 20 times earnings, or even more.
Keep in mind that, in business, among many other factors, size matters! The ways that earnings are measured also change as a business gets larger.
Annual cash flow to the owner (a.k.a. Seller’s Discretionary Earnings – SDE) is used for deriving rules of thumb for most small businesses.
This cash flow, or SDE, is calculated differently than EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) used for mid-market businesses that are professionally managed, but still privately owned.
EBITDA is completely different, too, from “Net After-Tax Profit” used in the world of public entities. When you review public company comparisons, for example, you deal with completely different P/E (price-to-earnings) ratios.
Don’t get confused. Take time to understand the terminology differences and which ones apply to your firm.
If your firm is owner-operated, that usually means you’re in the small business category, regardless of sales. That tends to define the way your business is run, how you keep records, and who will want to buy what you have created.
Loan availability is also different for smaller business acquisitions.
Banks don’t like to lend to inexperienced buyers buying a small business. Banks are resistant to lending to buyers who lack experience in the specific type of business they are buying, or who are unfamiliar with its market.
Corporate acquisition groups will usually make offers only for the biggest niche players, and some of these groups, too, are not experienced enough in the eyes of third party lenders.
Most sellers of small businesses must “seller finance” in order to sell.
The good news, however, is that seller financing can get you a better price, a more certain transaction, and helps minimize tax consequences. Playing banker for your own deal can be profitable.
So, don’t be too discouraged by what you hear and read! But, do expect to be surprised.
Business pricing is confusing and surprising for both sellers and buyers. Remain open minded as you ask around and talk to your team of advisors.
You Are the One Most Likely to Breach Your Own Confidentiality
Your biggest concern is and should be the potential breach of your confidentiality. When a business is for sale, you DON’T usually want the whole world to know about it.
Why not? Well, there are typically about five reasons why you want to keep the potential sale of your business confidential.
You don’t want your employees to ride a roller coaster of fear. You don’t want your creditors or vendors to pull the rug from under you. You don’t want competitors to use it against you. You don’t want your time wasted by curiosity seekers who think they’re potential buyers, but really aren’t. And, you don’t want to be approached by relatives at the family outing to ask if you’ve sold yet.
The sad truth, however, is that you will likely be the guilty one that breaches your own confidentiality. Without receiving training on how to avoid this, you will likely be the one to tell your relatives and confidants. They, in turn, with tell others. Your secret will be out. Particularly if you try to sell it yourself, confidentiality has probably been breached.
The ways to mitigate this are to see professionals early-on and strategize about maintaining your confidentiality. A confidential sales effort is best.
All that being said, however, we can report to you that even a simple confidentiality effort usually does the job.
Most brokers, lawyers and accountants are good at keeping things confidential. Today’s buyer prospects are asked to sign confidentiality agreements (a.k.a. non-disclosure agreements or NDAs) as a standard practice.
Only 20% Sell in Year 1
The odds of actually selling your business within the first year are only about 20%. But, the more unique your business appears to be, the less predictable that percentage is.
A profitable business, serving a unique specialty market, with a great physical location, and represented by a skilled team of professionals working for the seller, can sell quickly. The same business, without a profit, in a bad location, and not represented professionally, can take years to sell, or can just fail to sell.
Considering the data that we know about in our markets, it would be a fair statement to say that – all combined – only 20% of businesses in those markets put up for sale by brokers and/or for-sale-by-owners will sell within the first year of the sales effort.
The biggest reason is that sellers are not realistic on the price and terms. A second major reason is that they are not properly prepared when the first (and sometimes best) potential buyer shows up. Buyers are better informed and more demanding of information than ever before. Overpriced and poorly documented business-for-sale offerings drive buyers away.
Hiring, listening to and following the advice of your own professional team of business advisors will improve the odds.
Only 2% of Buyer Prospects Ever Buy
Using the same sources of data – and we actually have much better data on buyer prospects – only 2% of all people who make contact with a broker or seller to buy a business will ever finish the process! These figures vary by market and by broker, but the percentage is nearly always this low.
There are, of course, stages of buyer involvement – stages where the odds improve. If the buyer prospect signs a non-disclosure agreement and offers appropriate financial disclosures, then the odds go up – but only to about 5%. After a first face-to-face meeting with the seller, the odds double again – to 10%.
In subsequent contacts, the odds gradually increase until they hit a new peak at the time the business seller and buyer reach agreement in principle on price and terms – it’s then about 50%. With financing approval, it probably jumps to 80%. When the check has cleared the seller’s bank, only then is it 100%.
These odds also apply to the seller’s adult child or a key employee. Child and key employee familiarity with the business would seem to increase the chances they will buy, but that is offset by their familiarity with the problems, which decreases the odds they’ll buy.
Both the owners’ children and key employees usually rate low on financial ability and/or the willingness to pay a market price. The more they see themselves as owners already, the less they want to pay a fair market value for the business. There is almost always – among the owners’ children and key employees – a feeling of entitlement.
Money Is the Least of Your Worries!
Yes, that’s easy for US to say about your sale. It’s not OUR money!
Our goal as your team of advisors – whether we are brokers, lawyers, accountants, financial advisors or even lenders – is to get you the best deal we can. Sometimes, it’s just a money equation. You want it. Our charge is to get it. Simple enough.
On the other hand, most of us are going to run out of time in our lives before we run out of money.
This is a profound reality that we all need to think about.
A leading business guru – Michael Gerber of “The E-Myth” fame – argues that you need to run your business with the primary aim of giving yourself more life. Our advice to you is to run your business sale process with that same primary aim.
Your business may have a mission of producing a great product or offering a wonderful service, but the primary aim – the reason you started or bought it in the first place – was to give you more life.
Making quality widgets and taking care of customers is a noble thing, but you need, want and deserve a better life if you’re going to go through all of this effort to own and run a business.
As you sell your business, don’t lose sight of what’s really important.
This is not the time to fight over pennies with a buyer, prove you’re right about something, or try to prove you can “stick it” to the government. If you are still up for those struggles, why are you selling your business?
Your time is running out. This is NOT a game. This is your LIFE going by.
So, what’s the surprise here?
If you hire us – and we accept the assignment – we will be your agent and do whatever you want that’s legal. But, not before we tell you the truth.
You want a professional. You need solid advice on price and terms before you ever enter the market.
You should seek out a business broker who has systems in place to preserve the confidentiality of your transaction. You need a professional advisor who thoroughly understands the market of buying and selling businesses.
You deserve a business broker who will tell you your odds about when to hold and when to fold.
Most of all, however, you need a professional – actually a whole team of professionals – who are wise enough to help you to get to the other side of your business sale, where there is, in fact, more life waiting for you.
After the Sale
After you go through all the steps of selling your business, and it’s finally sold, what will you do next?
We have a unique suggestion. Don’t retire. Start over!
Corollary: If you don’t know what you’re going to do to start over, don’t sell until you have a strategy for starting over!
Since you already know something about running an enterprise, perhaps it would be best to start the next phase of your life with the intent that it will be your most successful enterprise ever.
Since you are going to miss running an enterprise after you get a good night’s sleep, why not make your “retirement” an enterprise?
Take all you know about running a business and apply it to the rest of your life.
Ideas and an Action Plan
So, how best can you apply your business knowledge to make the rest of your life better?
In as few words as we can, we give you this checklist of ideas:
- Make time. Prioritize your future time based upon YOUR priorities.
- Lessen your stress. Pay attention to how the other mammals do it!
- Budget for lots of profits – and not just the money kind.
- Go for work/life balance. Do the work you love and love the life you lead.
Based upon those ideas (which come from the writings of Glen, our managing partner), here is a recommended action plan that Glen suggests:
1) Search and Discover. Get mentally engaged in something you like. Search the areas that interest you.
Discover what you haven’t had time for before. Get a hobby. Search the Internet, read the blogs, the articles, the discussions and some good books, listen to relevant audios and view the right videos.
Learn all you can – in every way you can – about what you think you want to know more about.
2) Envision and Dream. Envision what you want for yourself. Dream about what could be. Decide what’s next in your life.
Write down some goals and objectives – maybe just like you did in your first business? Think big. Think very big! Ask yourself how your world can be made better. Adopt a cause that makes your world better.
3) Focus and Create. Focus on something. Experiment to give yourself a “quick win.” Try to create something. Find an immediate outlet for your energy today. Get physical. Do something you know you’d like to do. More importantly, choose to do something that you know you CAN do!
4) Share and Support. Share your “quick win” experiment with someone else. Get feedback. Get support. If the feedback is negative, seek another’s support. Reconsider if needed, but make sure that you are reaching out to others.
Offer support, as well, to anyone else who is taking this type of risk to share with you. Be a part of building a community – whether it is two people or 1,000 – gracefully giving support and constructive feedback to each other.
5) Plan and Control. Build upon your initial experiment. This time, however, focus on both short-term and long-term consequences. Review those goals and objectives again. Add some strategic and tactical plans, perhaps.
Although we cannot control others, we can control what we plan. Everyone is different, however. Plan in whatever way you want to establish whatever level of control over yourself that you want and need.
6) Act and Engage. Work your plans. After you have taken the needed pause to plan, start running in the direction of your plans.
Go fight the good fight. Volunteer for the front lines of your own battles.
In business, a great boss leads colleagues by demonstrating, “This is the way we do it here. This is the way we change it here.” Right?
Now, in your personal life, you must lead yourself. Choose the way you will do it – and change it – that is custom made for you.
Make This Next Year Your Best!
As you seek to sell your business, don’t worry so much about whether or not it’s “the right to sell”. In many ways, the business-for-sale market is always in balance between supply and demand. It’s much more important that it is your right time to sell. If you are ready to sell, then it is the right time.
Pay attention to the basic business selling steps – build your team, price it right, prepare for the sale carefully and develop your sales package carefully.
Get that team of yours – your broker, lawyer, CPA and financial advisor – to help you target your prospects, handle negotiations professionally, and get to the closing on time.
Learn the questions you should be asking these folks. Ask the questions.
Don’t be surprised now with the surprises we’ve already told you about above.
Finally, take all those years you have accumulated – with all those lessons and understandings – and invest them now in the future. Make this next year – and all of your future years – the best they can be!
About the Authors:
Glen Cooper, founder and managing partner at Colorado Business Brokers, has been a business broker since 1979. He has successfully led business brokerage firms in Maine, New Hampshire and Colorado.
For 26 years, he was also an active and credentialed business appraiser. He is even a well-known national instructor and coach for business brokers.
Glen grew up in Ft. Morgan and Boulder, left for 38 years, then returned to his home State of Colorado in 2010. He was founder of Maine Business Brokers (1981-2010), now the largest business brokerage firm there, which he sold in 2010. He was vice president of New Hampshire Business Sales, that state’s largest firm, from 2004 to 2010.
Glen has appraised and/or sold over 500 small businesses. He and his wife live in the Northglenn suburb of Denver.
Carolyn Ryan, MBA, is a founding partner at Colorado Business Brokers. She has over 20 years’ experience as a small business owner, international marketing expert and global trade specialist.
She co-owns three family businesses, all in real estate and focused on historic restoration and community development.
Carolyn spent ten years as International Marketing Manager at Colorado’s own Celestial Seasonings. She also served as assistant to the state’s Asia Trade Specialist at the Colorado Office of Economic Development & International Trade. She has extensive experience marketing products worldwide in the fields of natural foods, health and fitness.
Carolyn has a BS in Marketing from Arizona State University and an Executive MBA is from the University of Denver. She is a Colorado native and lives with her husband and two children in Louisville.
Scott D. Perry, MBA, is a founding partner at Colorado Business Brokers. He has over 20 years’ experience as owner of both “virtual” and a “bricks-and-mortar” small businesses. He also has extensive experience in business turnarounds.
Scott is the founder/owner of a website connecting local fitness opportunities with people looking for fresh fitness experiences. In addition, he built and co-owns a self-storage facility business.
He spent 13 years in construction and in commercial real estate consulting before moving to Colorado. In Colorado, Scott spent five years in global mining technologies, leading the turnaround of two international companies.
He obtained his BS from Wayne State University in Detroit, and his MBA from Syracuse University in New York. Scott lives with his wife and three children in Lakewood.