The Fundamental Principles of Selling a Business

You’re thinking about selling your business, and we’d like to help. Each advisor works with only three or four sell side engagements with business owners each year to insure success. Plus, we only work with businesses with a market value of over $1 million.

But before you call us or any other M&A advisor, we recommend that you learn a few key fundamentals about selling your business because doing so will improve your odds significantly.

Every Business Broker, or as we prefer to call ourselves, M&A Advisors, will tell you he or she can sell your business. They’ll often refer to the long list of potential buyers beating down their door for businesses like yours, and more often than not will agree whole heartedly with your desired selling price or maybe substantially more.

We’re not going to make any promises before we get to know you. Even then, what we tell you will be realistic and based on our industry knowledge and 20 years of selling businesses like yours. We want your business, but only if we’re certain that we can help you with a successful transition. A failed business sale is not only bad for your business, it is bad for ours.

Three out of four businesses won’t sell because they shouldn’t be on the market yet. They need more time to prepare… essentially, “more time on the vine.”

We view our engagement with you as an annuity. We spend time with each business, slowly preparing them for an eventual sale. Waiting has paid big dividends for our business and our clients. We are in this together for the long haul, if need be.

We would much rather sell your business for twice as much, and in half the time in 4 year, instead of having you endure low ball offer today.

On this page and the rest of our website, you’ll find an abundance of information that will help you understand how middle market businesses like yours are valued and sold, as well as examples and case studies of both successful and unsuccessful engagements.

Our goal is to help you understand the nuances and complexities of selling a business so that when you do decide to sell, you’ll do so for terms that will make you a happy in the long run.

How Middle Market Businesses are Valued and Sold…

Selling a car is simple.

You Google the going price for your make, model and year. You determine the asking price based on the car’s condition, and expect a little haggling. Post an ad on Craig’s list, wait a few minutes, and sell the car within a day or two.

We all wish that selling a middle market business were that easy. But, then… if it was, we’d be looking for another line of work.

We started our firm fifteen years ago, because the system for selling mid-market businesses was broken. Only one in four businesses sold, and many of the buyers came away empty-handed as well, the market did not work, and still does not. And things have gotten worse — in the last 15 years, the average time to close has gone from less than two months to almost a year!

… And Why Many Businesses Don’t Sell

The reason that middle market businesses don’t sell is that they shouldn’t be on the market in the first place. They are just not ready, will not result in a fair price to the Seller, and thus the Sellers does not sell.

The fundamental problem lies in what we call the “Opacity,” or lack of transparency in the selling process. That is, there’s more fuzziness than clarity in selling a business of your size. There are usually as many opinions about a deal as there are people involved, including you, your attorney, your CPA, and the buyer’s team.

Fuzziness In Timing…

Many clients are surprised when we don’t immediately pressure them to sell. They’re even more surprised when we encourage them to wait.

“When to sell” is never a simple puzzle to solve. A lot depends on your needs, your personal timing, your family, and the opinions and feelings of your employees. The timing may not be right because of personal concerns, or because you want to build more value into your business before you sell.

There’s a lot to consider, which is one reason we refer to the overall process as “Succession Planning” instead of “Exit Planning.” We know that you’re transitioning from owning this business to something new, which could be running your old Company for somebody else, or transitioning into retirement. Or, as with Bob above, it may be relieving yourself of the worries without giving up the work and people you love.

We don’t know your reasons for selling, but you can be certain that we’ll find out what they are, and then have a frank discussion about the best way for you to achieve your goals… even if it means waiting years until you’re ready. (Read our article on Succession Planning to learn more about how it works…)

Fuzziness in Value…

A big part of the conversation about timing includes an honest assessment of the value of your business. You’d think that determining the value of your business would be easy and clear as a freshly-cleaned window. It’s just numbers, after all…

It’s natural to gravitate toward the biggest number. In many cases, the M&A Advisor who gives the highest valuation number gets the engagement. It sounds good on paper, but three out of four times results in a failed sale.

Consider this…

A buyer will acquire your business for one of three reasons:

1. They have a business problem that buying your business will solve;
2. They see the purchase of your business as opening a new door or giving them an easy foot into a new line of business;
3. Or, they simply want to acquire more businesses in a particular niche… for fun, profit, or the challenge.

And, they will buy a business for…

• Its people (human resources)…
• Its equipment or technology…
• Or the potential profit.

What you consider to be of high value may be an intangible, or worse – an expense – to the buyer. And, what he considers to be of value may be something that doesn’t show up on your balance sheet.

The true value of your business in the eyes of the buyers isn’t always clear, and you can’t simply do comparison shopping on the Internet as you can with cars.

Want you can do is to build value into your business. We start with the easiest things first, then give you a cost-benefit analysis of other options so that you can decide what you will or won’t do. (Be sure to read this article on Business Valuation to learn more about how to build the value of your business).

Transparency Makes Selling a Business Easier

We know from experience that the selling process, from valuation to due diligence, is fraught with ambiguity, uncertainty, and differences of opinion. So, we want everything to be out in the open from the start.

Any single difference of opinion or inconsistency can cause a buyer to back out, so you want to eliminate (or illuminate) potential problems up front. Besides, what you might consider a problem could be a bonus for your buyer. Problems do not kill deals or lower the price a Seller will pay; surprises do, and with the amount of due diligence done on even small deals today, everything comes out eventually.

This means being transparent. Probe. Assess. And, systematically ensure that every detail is made plain as day every step of the way. The buyer will uncover problems and inconsistencies, so it’s in your best interest to uncover or divulge them first.

In our 20 years of doing Mergers and Acquisitions, we’ve learned that transparency is always the best policy.

And, for us, transparency means…

• Being educated: Understand how businesses like yours are valued and sold so that there are no surprises, and you can sell when you’re ready for the best possible terms…
• Being honest: If we think you can get more, we’ll tell you. We’ll also tell you if we don’t think your business will sell for your desired asking price, or for your desired terms.
• Being patient: Today might not be the best time to sell. We’ve helped some clients go from selling agreement to close in six months, and we’ve worked with some clients for up to ten years before they were ready to sell.
• Being systematic: There’s not a market for mid-market businesses. Selling a mid-market business requires a systematic approach with well-defined timelines and processes (Read our article on “Selling a Business: The Selling Process“).
• Being thorough: Everything should be out on the table before you or we contact potential buyers. We close engagements far faster than the industry average because we spend less time in due diligence. We’ve already got the answers to their questions.
• Being firm: Transparency doesn’t mean that you always cater to the buyer’s wishes. It means giving them the information they need to make a decision, and telling them when their request is irrelevant.

Next Steps

1 Let’s Talk

If you feel ready to begin the process of selling your business, then the next step is for us to sit down and talk. Like we said, we can’t promise that we’ll work with you today, but you can be certain that we’ll tell you exactly what we think, and what you can do to best prepare for your transition.

We’ll assume the role of a buyer. We’ review your financials, perform a recast, and come back to you with a valuation of what we feel the business is worth based on our experience and knowledge of your market.

We’ll also offer our professional opinion on areas on which you can focus on to increase the value. If you decide you’re not ready, we’ll set up a yearly review of your financials and the market situation to see if your business is worth more, the same, or less.

2 Become Well-Educated

Read the articles on this website and learn as much as you can about the process of valuing and selling a mid-market business. You’ll make better decisions that increase the value of your business and help you to sell at the right time and price.

3 Get Your Team Together

In the mean time, we’ll have you call your CPA if you haven’t already done so to get an idea of the Tax Effect of the Deal (see our article on How to Structure a Business Sale), so that you have a true idea of what the deal is worth to you. The valuation is only half of the picture. You need to fully understand the tax implications as well.

Ready for the next step? Call us today.