Everyone who has ever dreamed of owning a business has also dreamed of selling a business. Usually for a life-changing amount of money.
We can group business owners who want to sell their company into two categories.
In the first group are owners who have a plan to build their business and increase its value over the next several years. In the other group are owners who are ready to sell today – if not sooner.
If you are in that second group it will be hard to make dramatic improvements in your company’s value in the short term. But there are specific steps you can take to make sure you get the highest possible price when selling a business.
Here are the 4 most important of those steps.
#1. Run the business as usual until the sale is complete
One of the most common mistakes business owners make is that they mentally check out once they decide to sell. Their focus and energy go into the sale itself and their plans for after the sale.
Believing that the business will soon belong to someone else, many owners stop doing the things that made them a success in the first place.
But selling a business is not like selling a used car, or even a house. Under the best of circumstances the process can take 6 months to a year. And in some cases 1-2 years. The more unique your business and the higher your asking price, the longer you should expect it to take.
- Make the decision now that no matter how long the sale takes you will continue to do all the things that have made your business a success.
- Continue your marketing, training and product development programs as if nothing has changed.
- Keep collecting those delinquent accounts-receivable just as aggressively as you always have.
- And most importantly, keep treating your customers like royalty. Customer service is usually the first area to go downhill once the owner has stopped paying attention.
In other words, continue to run your business as if you were going to own it forever. Otherwise, your business may not be as attractive in 6 months or a year when you finally find the perfect buyer.
#2. Keep the sale confidential
The extended time it takes to sell your business also means you should keep your plans to sell a secret. When it becomes known that a business is for sale, suppliers may become hesitant to extend terms and customers may become afraid to enter into new contracts.
Meanwhile employees will begin to worry about job security. Inevitably their energies will be focused more on finding a new job then on performing their current one.
Owners often feel obligated to tell employees and customers of their plans to sell. That’s understandable – especially when it comes to people who have been with you years or decades. But in most cases your employees and customers can’t do anything to help you sell. Yet their emotional, sometimes angry, response to news of the sale can complicate the entire process.
As we have already stated, one of the keys to selling your business successfully is to continue to operate the business usual. And you can’t do that with all this uncertainty among your customers, suppliers and employees.
So keep your plans to sell confidential. This will allow you to have as much control as possible over the long and often complicated process of selling.
#3. Think in terms of a “pool of prospects” not a single buyer
Here is one thing to always keep in mind about selling your business: the most attractive and qualified buyers have the most options. Any prospect who is qualified to buy your business will be qualified to buy lots of other similarly priced businesses too.
Unfortunately, many owners, in their fervor to sell, fall in love with the first decent prospect they meet. Then they stop looking for additional buyers.
But there is an old cliche in the business brokerage world:
Having one buyer is the same thing as having no buyers
Your one and only prospect may choose to buy someone else’s business – through no fault of your own.
But even if that one prospect does decide he wants your business, you will be at his mercy when it comes to negotiating price and terms. If you don’t give in to his demands for price cuts he can go on to the next business for sale. But what will you do?
To maximize your selling price you need to negotiate from a position of strength. And nothing will strengthen your position more than having multiple buyers interested in your business. So always be in the process of locating and qualifying additional prospects.
The more potential buyers you find the more confident you will be when you sit down to hammer out a deal with your very best prospect. If for some reason you can’t close the deal with that person, you will be secure in the knowledge that you have other quality prospects waiting in the wings.
And this is the situation you need to create for yourself if you are to negotiate your best deal.
#4. Offer to finance part of the selling price
It is not a popular idea but is a fact – to sell your business for the most money possible you will probably have to finance part of the sale price. According to BizBuySell.com over 80% of small business sales include some form of seller financing.
Remember that the type of buyers who are capable of paying cash for your business have options. You are competing with all the other businesses that are for sale to attract these qualified buyers.
So let’s take a moment to look at things from the perspective of a qualified business buyer.
- Let’s say an individual has $250,000 to invest. And let’s say you want to sell your business for – coincidentally – $250,000.
- Sure, you would love to get all your money up front from this person. But she looks around at other businesses that are for sale and sees that she can put $250,000 down on a business worth $500,000.
- Then she finds another business for sale where she can get even more leverage – she can put 33% down on a business worth $750,000. (These types of asking prices and down payments requests are commonplace.)
Of these three options most buyers will not choose to pay all cash for the smallest, least profitable business.
In the best case scenario the buyer might offer you $200,000 – fairly pointing out that she deserves some concession for paying all cash up front. After all, the bigger more profitable businesses are not demanding 100% cash up front.
- So you are putting yourself at a competitive disadvantage when you ask for 100% cash.
- And when you demand all cash for your business you are automatically eliminating all the buyers who have a 50% down payment.
- And you eliminate everybody with a 70, 80 or 90% down payment too.
In other words, demanding cash shrinks the pool of prospects we talked about expanding in the previous point. But when you offer to finance part of the sale price you dramatically increase the size of that pool.
The bottom line is that when you offer to finance part of the sales price you make more money. Tom West, author of one of the most influential books in the business brokerage field,The Complete Guide To Business Brokerage, estimates that businesses that sell for all cash bring a price that is only 69% of the original asking price.
Meanwhile, in BizBuySell.com’s most recent survey of businesses sold through their site, the average sale price was 89% of the original asking price.
There are two other benefits to keep in mind when discussing seller financing.
- First, when you finance the sale over 2-3 years you are spreading your income over that period, possibly lowering your taxes by a significant amount.
- And second, you will be collecting interest on those 2-3 years of payments. Add up the interest you collect and the lower taxes you pay and it is likely that offering to finance the sale will put more money in your pocket not less.
Selling a business can be a long, emotionally draining experience. Fortunately there are specific things you can do to insure your success.
So keep running the business as usual. Keep the sale a secret. Keep looking for additional buyers. And finally, be willing to meet those buyers halfway on the price and financing terms. Do these simple things and you will have gone a long way towards maximizing the amount of money you take away from the sale of your business.
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