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| Risky Business (soundtrack) (Photo credit: Wikipedia) |
ENTREPRENEURS
Rob Slee from the Midas Institute writes a lot about different values a private business lives in at one time. These various values all depend on how the buyer looks at your business. One of the most important factors to remember when it’s time to sell your business is the size of your business. The smaller your business is, the harder it’s going to be to sell and the easier it is for a buyer to walk away without paying you everything that’s owed.
Buyers of small businesses have fewer resources available than buyers of larger privately held businesses. This is one of the main reasons you’re likely to get less than a cash deal when it comes time to sell.
One of the smart things I did when I sold my vending business was build it to a size where buyers with significant assets were interested in the business. I managed to get the interest of more than one buyer. Both of these activities helped me get a better deal than many smaller companies could get.
Know what the impediments are for potential buyers of your business.
You need to know how your business size fits into the world of business transfers. If your business does less than two million dollars buyers are likely to want you to hold paper either through a buyers note or an earn out. The more volume your business does, the less buyers insist on you taking all of the risk when they buy your business.
Buyers of smaller businesses tend to be people without significant assets. Larger businesses are able to attract buyers that can afford to pay cash for their business. These buyers want to pay cash so the seller is out of their hair. Smaller businesses don’t provide enough sales or cash flow for big businesses to pay attention. That means the buyer pool comes from smaller businesses or individuals. Both of these groups are often short on money. When people like this buy your business they’ll require that you’ll take a significant part of your sales as a sellers note.
When you sell your business and your buyer has few assets you’ll become their bank.
A successful sale to a less well-financed buyer is actually getting paid the money you’re owed. The better the business is run by its new owner the higher the probability you’ll get all of the money that is owed you. If your buyer doesn’t do so well and makes some large mistakes, you’re the one who’s going to pay the price.
If for any reason the business you’ve sold starts performing poorly, the buyer is going to blame you for their problems. This is when you can almost be sure your payments from your buyer are going to slow down or even worse, stop coming all-together.
If you’re going to provide owner financing, act like a bank.
This should be an obvious position to take. It’s also one that I rarely see done well. When you act like a bank you need to make sure you get adequate security from your buyer. Adequate security means your buyer actually has real collateral that can be turned into cash if they decide to stop paying you. This will be a tough part of the negotiations. If you don’t take a hard stand, you could end up holding the bag for a large portion of your sale with no way to collect money that is owed you.
Too often I’ve seen sellers believe that the buyer will always pay them. After all, the seller saw the buyer’s balance sheet, and there are plenty of assets to get if things don’t work out. If this is your belief, think again. You could easily become one of those who thought their money was safe, and because you didn’t take a hard stand on personal guarantees and security agreements your buyer ends up ruining your business and walking away from the debt that’s owed you.
Whatever reason you have for selling your business you must remember that’s going to be a risky affair. Do yourself a favor and make sure you have a way to get paid, even if the buyer stops paying you.
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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
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