You want to sell your business.
And also get the best price for it, of course!
Let’s start by what that really means.
While six to twelve months is the average time to sell a business, selling time varies by business size, type, and market. Based on that model, six months is quick!
Simply lowering the price will seldom cause the business to sell, although there are some buyers in the marketplace who will scoop up grossly undervalued businesses. But then you won’t get the best value from it.
For the most part, people won’t buy your business if they don’t like it– never mind the price. The search for the right ‘fit’ in a buyer is still one of the most critical parts of the process.
So—whether you plan to sell it yourself or engage a professional i.e. a certified business broker to assist you in selling—what is the process? And what can you do to keep the momentum at each stage?
At its most basic, there are four main steps to selling a business:
- Establish a reasonable price for the business;
- Market the business; prepare key documents.
- Screen inquiries and manage negotiations;
- Accept the best offer and complete the sale.
Let’s look at each.
Establish a reasonable price for the business
A reasonable asking price should factor the true earnings and what the market is willing to pay. Business patterns, systems, competition, markets, quality of service or product, staff and operational factors are all predictors of future earnings and need to be taken into account.
Buyers are looking for an ongoing income. All things being equal, a better bottom line will lead to a higher business valuation.
Business Broker Bonus: Business brokers possess a unique skill set: They are knowledgeable about valuation principles, financial statement analysis, taxation implications, inventory and goodwill issues, and so on. They know how to optimize the value of your business to move it up the value chain.
Small business financials do not tell the full story. Experienced business brokers have the business and financial acumen to uncover the true benefits of ownership and illustrate them to the potential purchaser
Market the business confidentially
Telling the world that your business is for sale can cause it to lose employees, customers, suppliers and value. Any advertising you do shouldn’t specifically identify the business or give out details that would let the cat out of the bag.
Here’s a real-life example for a “High Income, High Margin Home Improvement Service Business” advertised by Sunbelt Toronto West on Sunbelt Canada’s website.
In business for four years, sales and profits have grown quickly. There is high demand for the company’s services. Weekly sales average $16,000 per week. All work quoted is from buyer leads that come in from referrals, the web and advertising. Calls are first handled by the franchisor’s call centre. There are no cold calls to buyers. The owner is focused on visiting client’s home and quoting jobs. The work is performed by talented sub-contractors who are self-managing. The business has many customer reviews on Homestars and they are top reviews. The business can easily be grown, first by adding a part-time call screener to make the initial contact with all of the client leads, along with adding another estimator in addition to the owner, to visit homes and quote on jobs. The seller believes these would allow sales to double. Currently the seller does not work on weekends, so adding weekend client appointments is another opportunity for growth, as there is more production capacity with the current sub-contract teams. The seller will do a good training and transition with the buyer, showing you how to continue to run the business successfully and how to grow sales.
Did you notice the training and transition reference in the ad? At the minimum, you should expect to stay on long enough to train the buyer.
The notice also referenced three financials: revenue of $800,000, discretionary income of $200,000 and an asking price of $450,000.
But it didn’t include the company’s name, photo, specific location or other such identifying factors.
Business Broker Bonus: Brokers with a well-established firm have access to a database of active buyers—owner-operators, financial buyers and strategic acquirers—looking for businesses. They can expose the opportunity to hundreds of prospective buyers without employees, customers or a competitors knowing the business is for sale.
A more detailed prospectus with information on the history, market, services and products, structure, staff, clients, suppliers, equipment, tools, systems, processes etc. and summary information about financials is only provided to qualified prospective buyers after a strict and detailed, legally enforceable non-disclosure agreement (NDA) is signed.
Prepare key documents
Buyers need three to five years of financial statements. Get yours in order so a buyer can have confidence in the financial control systems and reporting.
An accountant’s Notice to Reader Statement is the quickest and cheapest type of financial review.
Other documentation like workplace safety manuals, to operating systems documentation, hiring process, training manuals, termination procedures and so on are also important.
Business Broker Bonus:
Business brokers are in the business of selling businesses. They follow a process and know what is needed, in what order and when.
At this stage of review, they can point out ways you can increase value of your business and minimize taxes.
Down the road the buyer will want to do due financial, operational and marketing diligence so packaging it all up and being ready also helps maximise what you end up with in your pocket.
Screen inquiries and manage negotiations
You will have to meet with many buyers before getting the right one. You may receive competing offers. You will need to evaluate not only the offers but the buyers as well.
You should be prepared to take back a portion of the purchase price, paid off over time. Some 30 to 50% is reasonable.
Price, terms, closing dates, diligence timelines, inclusions and exclusions are all negotiable. The time and effort to negotiate any or all of these varies.
Both sides need to listen to and understand the other party’s position. Applying that advice when different cultures are at the table can be more challenging.
Business Broker Bonus: A qualified broker saves you time by prequalifying prospective buyers’ resources and potential for assuming your business, eliminating “tire kickers” and allowing you to keep your full attention on running your business to keep it in top shape while your broker is selling it for you.
They are used to applying selling and negotiation skills to find solutions that achieve goals of both buyer and seller.
As Sunbelt London owner/broker Erik Twohig says: “There are lots of good reasons for buyers not to buy a business, but it is critical to ensure that they don’t walk away for the wrong reason!”
Accept the best offer and complete the sale
It is in due diligence that 50% of accepted offers fall apart. Buyers are deathly afraid of the hidden flaw. If some things are not current and correct then they will believe that nothing is to be trusted.
Typically the seller’s lawyer will draft the security documentation and the buyer’s lawyer will draft the agreement of sale, the training and transition agreement and the non-compete agreement. Each then reviews the other’s documents on behalf of their clients.
Other service provider—lawyers, accountants, landlords, franchisors, lenders and insurance experts— will often be required to close the deal.
Do not commit your time or money until the sale is closed—deals can fall apart at the last minute.
Business Broker Bonus:
Full disclosure to a broker minimizes your risk at all stages of the selling process. Having them compile and review the diligence material early in the process will identify fatal flaws in time to correct them. They are familiar with what documentation and services are required and by whom.
In general, business brokers successfully close between one out of four and one out of seven engagements. In Canada, our brokers close seven out of 10. Real estate agents close about one out of 20 business listings. For-sale-by-owner (FSBO) businesses close at a lower rate.
And selling your business quickly is a moot point if you can’t sell it at all. Period.
If you are serious about selling your business and you want the sale to be managed as expediently, professionally, and profitably as possible, you owe it to yourself to spend some time with a certified business broker.
In this private and confidential interview we can provide further insights that will help you determine if your business is ready to sell and if your sales expectations are realistic.