Archive for

Selling Your Business – Why the Majority of Businesses Don’t Sell

Most businesses don’t sell so it’s vital to do everything possible to increase your chances.

Many businesses can benefit from working with a business broker, so lets learn about the ideal client and when it would be appropriate not to use a business broker. And what about the fees involved?

I’ll answer the second question first because it’s easy. It’s probably not appropriate to use a business broker when your business is not very valuable.

Most business brokers have a minimum fee and I’ve heard minimum fees from $10,000 to $15,000 to $25,000 if it’s a big business. So if you have a business that’s worth $30,000 it’s hard to hire a business broker who’s going to take $15,000 off the table.

So if your business is not very valuable you might want to try to sell it yourself.

If your business sale is going to have a time pressure element – for example your lease ends this month or you are very ill – if you don’t have three months to sell your business you probably don’t have time to use a business broker.

However, you might want to call a business broker because they could have a buyer ready to go.

Our perfect client is someone who makes money and can prove it.

Let me explain the fees. There can be a minimum fee but also there can be a percentage.

Usually there’s a percentage fee and, for the most part, you’re going to see 10, 12 maybe as high as 15 percent.

But, just in round numbers, say 10 percent on a business that’s a million bucks. That’s pretty much marketplace.

If things are less than a million dollars, maybe it’s more like 12 percent. And then if it’s less than $100,000 you’re going to have some sort of minimum fee.

With the economy as it is now, businesses in trouble come to us and try to sell for $200,000 and then they get into even more trouble and sell for $20,000. That’s when the minimum fees become hard to deal with.

We would obviously much rather transact a company for what they want, but sometimes there’s all kinds of issues involved. And the valuations over the last couple years have been very affected by the economy, very affected by dropping cash flows and maybe the inability to extend credit lines.

What percentage of businesses that go for sale actually sell?

The percentage that is bantered around the industry is about 20 percent. One out of five businesses that’s trying to sell their business sells. And then on the flip side, one out of every ten buyers buys.

So it’s a very inefficient market. Once again, that’s why you need a pro to try to put two people together, because it’s very difficult to do it.

Even at Transworld, 55 percent of the deals where we have a meeting of the minds actually get to the closing table. That means almost 50 percent of the deals where we have a meeting of minds – both the buyer and seller agreeing on the price and signing a contract – don’t go to the closing table. So it’s a very precarious process.

It’s very important that business owners learn these kinds of statistics, so they have realistic expectation that they need to pursue this aggressively and it just may not happen. What are the main reasons for these low numbers?

It’s usually third party interference. That could be a number of interference points. It could be an accountant telling someone that they’re not getting enough money. It could be a lawyer being a deal killer. It could be a landlord that refuses to sign a lease.

It could be someone on the bank side saying yes, yes, yes, yes, and then at the last minute they say, no, they’re not willing to finance this transaction.

It’s the buyer not being able to come up with the money from Uncle Bob that they thought they would come up with.

It could be a seller that just gets remorse, who decides they just don’t want to sell their baby.

All of these things come into play to make it a very inefficient process.

Selling Your Business – Preparing to Get the Best Price Possible

Taking the right preparatory steps can help you get a much higher price when selling your business.

One of the key interests of any business owner looking to sell is how much they can get for their business. Lets walk through the business valuation process and how a business owner can best prepare for it.

First off, the value of a business is based on future profits and true valuation methodology is based on future cash flows.

So how do we predict the future? We look to the past and just draw out a line. If the business made $100 or $200 or $500 last year, we’re just going to assume it makes that into perpetuity and we’re going to value the business based on that.

That used to be easy to do. However, the current challenge is that, in 2006 and 2007, it may have made great money and been on a growth pattern. But in 2008 and 2009 perhaps they barely survived or made no money.

How do we value this business? That’s been our challenge.

So what I would say to business owners is, as quickly as you can, right-size your business and make it profitable and show those profits on the books.

Make sure you have good books and records showing a buyer very succinctly how they’re going to make money into the future, that’s where buyers are going to buy.

So there’s a bunch of things that you can do to make your business more profitable and have it documented showing how the buyer is going to make money moving forward.

That’s really what buyers are looking for. And that can happen in very short order, so that’s why we think the future is good.

Sometimes it’s difficult for business owners to right-size because it may mean making hard decisions that people tend to put off. So is now the time to make those decisions?

I read something that said “Don’t waste a good crisis”. And I think that’s very appropriate.

Most businesses that are still in business now have right-sized and the good news is that everybody is going to be much more careful going forward. We’re working in a different paradigm.

I think there won’t be this exuberance or this overpaying for products and services that there once was. And I think that’s good.

Additional thoughts about how a business owner can prepare for a valuation and even for the sales process…

When you work with a broker or when you’re thinking about valuing your business, make sure that all your books and records are up to date and in good order.

You want to grow your earnings so that you are on an up tick as you go into this process. Make sure you can unwind any write-offs or the things that you did from real expenses.

And once again, remember, we’re looking at a business, the profits that a buyer would make. The seller may be saddled with debt that the buyer wouldn’t be. So we could recast the financials; that’s what a business broker is going to do.

As a business owner you want to get all the proper management and staff in place.

You want to make sure your business has the capacity to grow and make capital purchases if you have to get things ready.

And if you have old machinery or old inventory clean it up, get it out. It’s like selling a house. You want it to look sharp because a buyer is going to walk through your business and picture themselves running that business on a day-to-day basis. If it’s dirty and unorganized, buyers aren’t going to be attracted to that.

You also want to control, manage and document inventory. You want to know exactly how much inventory you have. Don’t play with inventory numbers to save taxes. You want to avoid that and/or write it off before you go into this process.

And you’re going to want to put a team together, and that includes an intermediary, a transaction attorney and your accountant. You want to get your family on board, and you want to plan this out.