Speaking From Experience: The Necessary Factors To Sell A Business

Created 1 years 32 days ago
by RitaP

Categories: categoryValue Proposition
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by Dave Driscoll

For more than 12 years, I have been in the business of helping owners sell their businesses and move on to their life beyond business.™ As a business broker, I have been fortunate to have many owners place their trust in my experience and skills as a seasoned business owner, and I have been privy to many types of businesses inside and out. I’m proud to say that my company, Metro Business Advisors, has sold the majority of companies we were engaged to represent.

As a long-time contributor to Small Business Monthly, I have decided to take a break from writing monthly articles and contribute periodically, while continuing to actively sell businesses.

My objective in writing articles has always been to educate owners about what it takes to develop a business for sale, including the emotional preparation that is so crucial. Along the way, I’ve also presented the buyer’s perspective and defined the steps necessary to increase business value so owners can sell their life’s work for maximum value to support their retirement or other ventures.

So, What Sells A Business?

The seller must balance their wants against what the buyer needs from the purchase.

But what does that really mean?
To successfully sell a business, the seller must realistically consider what the buyer needs to be successful if they acquire the business. The seller must step into the buyer’s shoes and remember what would be important if they were the buyer.

As a buyer, would you want to buy a business that…
- Is owner-dependent?
- Has incomplete financials that don’t tell the true story of the business?
- Is part of an industry with an uncertain or unstable future?
- Has a seller with unrealistic expectations regarding the sale price or terms?

I approach these questions from the negative to demonstrate that there is no mystery in the sale/purchase of a business. What is good for the seller is good for the buyer. If a seller is looking for a fool with a big bag of money, they will be very disappointed, and their business will not sell.

Although I could write many articles (and have) about each of these four points, let’s focus on a few ways to position a business for the highest probability of being sold.

1. Owner-dependence. If the business cannot operate without the owner’s daily attention, the company’s knowledge is “in the owner’s head”, and/or all customer relationships are managed by the seller, then the business really has no sustainable value to a buyer. In the unlikely event that a buyer were to entertain buying an owner-dependent business, the seller would need to stay for an extended time to provide training and ensure the business successfully transitions to the new owner. The seller would also need to be comfortable having a portion of the sale proceeds withheld until the transition is complete to demonstrate the seller’s continued commitment to the business’s success.

What can you do?
- Train and empower a competent team to be capable of running the business without you.
- Establish a second-in-command and decentralize decision making.
- Make yourself obsolete aside from big picture vision and strategizing.

2. Complete, accurate financials. Buyers need to understand how the business operates, including sales, cost of sales, gross operating profit and operating expenses. If your business financials do not clearly and accurately show the buyer these details, how will they determine whether the cash flow will satisfy the goals that are motivating them to buy a business? Incoherent financials will not sell a business.

What can you do?
- Document all discretionary spending that goes through the business.
- Review your P&L and balance sheet monthly or quarterly to identify trends, opportunities or problems.
- Employ an accounting service to help keep financials current while conforming to generally accepted accounting principles.

3. Business/industry stability and value. Would you buy into your industry in its current state? I spent 30 years as the owner of an envelope manufacturing company. With the development of the ubiquitous Internet, the use of envelopes plummeted, creating excess capacity, deteriorating margins, and widespread industry consolidation.

If your industry is outdated, shaky or uncertain, look for a merger partner or consider liquidation. Hanging on to your company with the attitude that you can just work harder and overcome a dying industry will eventually cost you everything.

What can you do?
- Either be an acquirer or an acquiree if your industry is faltering.
- Always look for tangent or novel markets for your product or service.
- Make the necessary investments to keep your company current in technology and innovation.

4. Seller expectations regarding the sale terms. Simply stated, selling the business will be very difficult if the asking price does not correlate to a reasonable industry “like sale” multiple of free cash flow or the seller is not flexible on price and terms (for example, demanding all cash). Maybe impossible. Recall the fictional “fool with a big bag of money” myth dispelled earlier. Additionally, a seller should not expect to be paid for “business potential”—at best, the buyer will only question why the seller didn’t personally take advantage of that potential.

What can you do?
- Base the asking price for your business on a solid market valuation, conducted by a professional.
- Focus your negotiations on setting the buyer up to succeed in running a profitable business.
- Realize you will need to spend time training and transitioning relationships to the buyer.

So, there you have it—the benefit of my experience simplified into practical action items to best position you for eventually leaving your business. As I am not leaving my business yet, feel free to reach out if I can be of assistance, and remember our library of educational blog posts at https://metrobusinessadvisors.com/blog/. I have enjoyed offering my advice from the perspective of a business owner and M&A broker to SBM readers. I wish you the best as you envision, plan and achieve your life beyond business.™

Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.