Free Advice

Business Owners on Selling

In a recent (informal) survey, a group of business owners shared with me their concerns over selling their business. Most were not interested in selling now, but knew that it’s their primary exit strategy.

There were four main issues. Two that stood out from the crowd and two that were slightly ahead of the rest.

1) What is the value (price)?

The top issue was knowing what the business was worth. In fact, there was some confusion. These owners see and hear a lot and much of that information is conflicting. One owner mentioned he recently read, in (two different issues of) an industry publication, two pricing guidelines that gave his business values where one was 70% greater than the other did. Guidelines and rules-of-thumb can do this because they are usually nothing more than averages. If I sell my company for 2X sales and you sell yours for 1X sales (let’s assume both are fair prices) the rule-of-thumb says companies in our industry sell for 1.5X sales. Yet at 1.5X sales, I’d take a big hit and your buyer would dramatically over pay.

During my presentation, I explained the difference between value and price. The valuation of a business makes certain assumptions and is at an historical point in time. The price is a function of the value, the perception of the future, the motivation of both buyer and seller, the terms and conditions and other factors.

2) Finding qualified buyers

Many of the owners knew the tasks that needed to be done. Most didn’t feel qualified to do these tasks and the confidentiality issue is huge. This verifies a comment from a seller to me about six years ago. He said, “I told one of my suppliers I was thinking of selling and that vendor put me on COD.”

Yet to sell, you must “let the world know” you’re for sale. Good buyers are hard to find. The buyer has a lot of businesses to choose from. The seller only has one to sell. When a qualified buyer walks through the door, blowing the deal could extend the process by months.

There were comments about intermediaries. One owner shared that for a while he was cold called at least once a week by brokers who told him that they had a buyer for his company if he would list it. He shared that he would never do business with any professional that had to cold call. For him, a couple “rookies” tainted the industry. This owner admitted he would probably need help at some point, however, he would be very cautious about where to get that help.

3) Retaining staff

Often, the key employees and management team staying with the firm post sale are a condition of the purchase. Neither the buyer nor the seller want to have the deal unravel because an employee wouldn’t stay or because an employee demands an outrageous raise. I’ve seen deals where the buyer demanded that two-thirds of the employees sign tight employment and non-compete agreements and I’ve seen others where handshake agreements was all it took.

It is a key issue because good employees are tough to find. We’ve seen big swings in the last seven years, from an employer market to an employee market and now back again. However, Business Week (Small Business Newsletter, September 11, 2001) predicts it won’t be long before good employees will be tough to find again.

4) Negotiating the deal

A big advantage of an intermediary is they help formulate a negotiating strategy and participate in the negotiations. This helps remove some of the emotion. Most people know that buying a business is a little like buying a used car. The asking price is set with the expectation of a lower offer. The best offers are usually not the first offer. Give and take is expected.

There also has to be the realization that you can’t take on one issue and not give on another. However, the important part here is knowing what to give and what to take.

A third party also helps by letting the buyer and seller maintain a solid relationship. An intermediary can help by keeping attitudes from becoming overbearing. However, if things do get heated, it’s not the relevant parties going at each other. The third parties wear the black hats, which pays big dividends when the buyer and seller “live together” after the sale.

Next month, the results of a survey on buying a business.

© Copyright John Martinka 2000. All rights reserved.