5 Questions to decide if you need the help of a business broker to sell your business.
1. Valuation– Estimating the Value of the Business
Do you know what your business is worth?
Like virtually everything else, a market exists for businesses for sale. Correctly pricing your company will attract qualified buyers.
The financial statements and tax returns will be the starting point of the business valuation. There’s also a bit of an art to getting the right asking price.
For small companies, most are priced based on ‘comps’ from similar past transactions. Having access to a database of these comps will be vital to getting the business priced correctly since most qualified buyers will have seen other similar companies and have a feel for how your company compares. Premium businesses attract premium valuations. Businesses in need of improvement typically sell at a discount to the average multiples.
For larger businesses, the selling price will also be based on the strength of the company’s management team, the type of business, revenue growth, quality of earnings, and other factors.
If you underprice the business, you’ll leave a considerable amount of money on the table. If you overprice the business, you won’t attract the type of buyers capable of completing a transaction. An experienced business broker can guide you through this process and make the necessary adjustments.
2. Packaging – Documenting the business properly
Can you describe your business accurately in writing?
With so many moving parts, you’ll need to explain the business to potential buyers succinctly. This is the purpose of proper packaging. Perhaps the most time-consuming aspect of selling a company will be the packaging process. Since you’ve run the business for so many years, you’ll have all of the knowledge, but can you write up an information memorandum in a comprehensive manner that a potential buyer quickly understands? After so many years deep inside the business and the industry, what may seem obvious to you may seem counterintuitive to a business buyer. Explaining these details will be vital in attracting many potential buyers.
3. Finding the Buyers – Who are the potential business buyers
Can you find enough buyers to receive competing offers?
If you’ve been in an industry for many years, you may already know the potential buyers for your company. Reaching out and talking about your timeline for retirement may be all that is necessary to generate buyer interest.
On the other hand, if you don’t already know who would be interested in your company, you’ll need to figure out how to find potential business buyers. You’ll not only need to know where to find potential business buyers but knowing how to qualify them will be a key to a smooth and time-efficient process.
For main street businesses, a posting on bizbuysell.com and other business sale websites can effectively attract interested buyers. Plan to speak with these prospective buyers individually. This will be a necessary but time-consuming process. Many will not have the necessary industry knowledge to be effective owners. Others won’t be able to finance a transaction. Removing unqualified buyers from the process as soon as possible will save considerable time later.
For more significant transactions, knowing where to find potential buyers and having established a previous relationship with them will drastically speed up the timing of a transaction. This is where an advisor can deliver value. If you can find an experienced broker who has done a transaction within your industry or can clearly articulate how they will find potential buyers, that is a good sign.
Typically it takes hundreds of potential buyers to identify and engage with the 10s that will express an interest. Knowing just 3 or 4 potential buyers won’t be enough to achieve an exceptional offer and get a deal done. You’ll need to receive more than a couple of offers to get the most for the sale of your company.
4. Negotiating Deal Structure – Mitigating Risk for Both Buyer and Seller
Do you know how to acceptably structure a transaction?
Rarely will a small company sell for 100% cash at closing. There is too much risk for the buyer for such a deal structure. Typically, buyers will offer some cash at closing and require the seller to either carry a seller note, an earn-out or retain some equity in the new entity to get a deal done. The details of this structure will be thoroughly explained in the purchase agreement. Knowing typical and customary and how to structure earn-outs is knowledge a broker can bring to the negotiations.
5. Maintaining Confidentiality – Can you protect your plans?
Can you keep your plans confidential?
It is vital to maintain confidential plans for something as disruptive as a business sale. You will want to protect your customer relationships from the instability of the unknown. You don’t want your key employees getting nervous and start interviewing with new employers.
If you already know your company’s buyer due to previously expressed interest, then it won’t be challenging to maintain the confidentiality of the transaction. If you need to market the opportunity broadly to receive competing offers, you’ll want to approach the marketing process anonymously.
This is another area where an intermediary can help protect your confidentiality. As you receive incoming interest from buyers, you’ll need to speak with them. Few rumors spread faster in an industry than the name of a business for sale.
Summary – Should you use a business broker?
If you already know the ideal buyer and have agreed upon a valuation, it is possible to sell the business yourself. If you don’t know what the company is worth and don’t know where to find enough potential buyers to receive multiple offers, then a professional business broker is the best way to manage the process.
Pursuing unsolicited inquiries builds familiarity with the process of selling a company. Keep in mind that the buyers cold calling you seek to buy a business without engaging in a competitive process. This lack of competition is intended to produce a transaction at a discount to the market price generated by a competitive process.
To explore your options and discuss the possibility of working with a broker, contact me at the email address or telephone number below. We will discuss your specific situation and decide on the best plan to move forward.
David Jacobs is a Licensed California Business Broker for Software and B2B Service Companies — Predictable, transparent, and orderly exits for business owners across the USA.