If you’ve ever thought about selling your business, here’s what you should know.
By William J. Lynott
SHUTTERSTOCK (5)
Sooner or later, the day will come when you are no longer running your business. Whether you decide to pack it all in and retire to sunny Florida, or you just want to cash in on all that hard work while you’re young enough to enjoy the fruits of your labor, choosing the right selling strategy will be critically important, especially in a challenging economy like the one we are experiencing now.
After a decade that saw business sellers calling their own shots, the economic meltdown of 2008 ushered in a precipitous drop in business sales, mergers and acquisitions. But the small business market has bottomed out, and the worst is past, said Bernie Siegel, Siegel Financial Group in Conshohocken, Pa.
“The poor economy of the past couple of years has resulted in many potential business sellers holding off,” Siegel said. “The result is a pent-up supply of potential buyers.”
Bryan Adams of FactSet Research Systems Inc. in New York agreed.
“An owner putting a business up for sale now will find that there are buyers out there,” he said. “There are deals to be done and willing buyers, so if you have a profitable, well-run and positive cash-flow business, you should be able to find a suitable buyer.”
A seller should choose to sell their business when it makes sense to them personally, Siegel said.
“One does not usually sell a business driven solely by financial goals, but rather when it’s time to retire, move on, move up or whatever,” he added.
While this might or might not be the best time to put your business on the block, any time is a good time to be getting it ready. If you have any notion of selling in the near future, take these steps to make sure that you bring a swan to market and not an ugly duckling.
1. Plan Ahead“Last minute, emotional decisions to sell a business seldom end up with a satisfactory sale,” said business intermediary Dick Marsh, R.H. Marsh Associates in Jenkintown, Pa. “I often receive phone calls from business owners who have had a frustrating day. ‘I’ve had it,’ they say. ‘I want to sell my business.’ That’s a recipe for failure.”
Experts agree that preparing a business for sale takes more than a few weeks of cosmetic touch-up. Potential buyers will examine your business with a calculating eye. Unless they see the likelihood of an excellent return on their investment, they will move on.
That’s the rub. Human nature being what it is, many business owners start to think about selling out when business is slow and profits are sluggish.
“That’s exactly the wrong time to sell,” Marsh said. “Nothing is more attractive to a potential buyer than a couple of years of solid growth in gross sales and net income. Nothing will scare off a buyer more quickly than a business that seems stuck in the doldrums.”
Preparing your business for sale, then, requires bringing it into a state of good health. When it looks so good to you that you begin to wonder why you want to sell it, it’s probably ready for the market.
2. Keep a Realistic View of Your Business’s ValueIt’s understandable: You nurtured the business and lived with it during good times and bad. It’s part of you. There is a genuine emotional attachment between you and your pet store.
Realistically, your potential buyer doesn’t care at all about your emotional relationship with your store. A buyer has one interest above all others: Can I make this business a success, and what return can I expect from my investment?
Potential buyers will examine your business with a cold, calculating eye. Unless they see the likelihood of an excellent return on their investment, they’ll move on.
That’s why you need to divorce yourself from emotional considerations and look at your store from the viewpoint of a cold-hearted buyer. Any business broker can tell you stories about sellers who have placed unrealistic selling prices on their businesses because they are too emotionally involved to be objective.
“The single most important piece of advice I can offer to a business seller is to develop an understanding of what your business is really worth,” Siegel said.
Trying to sell a business for more than it’s worth can damage the business, Siegel said.
Marsh offers this advice: “Ask yourself: Would I pay my asking price for this business if I were buying it? If the answer is no, it’s time for you to re-evaluate.”
3. Document the Progress of Your Business
“The first thing a sophisticated buyer will want to see is three to five years of financial reports in a form that follows conventional accounting standards,” Marsh said.
“The first thing a sophisticated buyer will want to see is three to five years of financial reports in a form that follows conventional accounting standards,” Marsh said.
A prospective buyer or their accountant won’t be satisfied with claims that your store actually is more profitable than financial records indicate. A seller who hopes to get a fair price for a business is going to have to demonstrate its true financial condition in black and white. You might not need full balance sheets and operating statements to run your business, but you most certainly will need them if you expect to sell it.
“When you’re ready to sell, you should have copies of all documentation related to the business—leases, a list of capital equipment, accounts receivable and payable, tax returns, etc.,” said business broker Herman Petrecca, Business Connection Plus in Jamison, Pa. “It’s also important to have a written description of the business, a current marketing plan and projections for the future.”
It’s in this area that many small business owners come up short, experts say.
“Make sure that your last couple of years of financial reporting are meticulously accurate,” said Siegel, “and be prepared to validate any financial claims.”
Paperwork might not be your favorite activity in business, but when it’s time to sell, any inability or unwillingness on your part to produce the required information will tarnish your offering in the marketplace.
4. Don’t Drop the Ball
“It’s not uncommon for a seller to neglect the business once it’s been put up for sale,” Marsh said. “That’s a big mistake. Any evidence that a business may be going downhill is a serious red flag to prospective buyers.”
“It’s not uncommon for a seller to neglect the business once it’s been put up for sale,” Marsh said. “That’s a big mistake. Any evidence that a business may be going downhill is a serious red flag to prospective buyers.”
Don’t make the mistake of thinking you can charm potential buyers with excuses or rosy projections of what your store could be under different circumstances. Instead, you can expect them and their accountants to cast a jaundiced eye on your past and present performance as a gauge of actual market value.
5. Prepare a Seller’s DocumentA seller’s document can be an extraordinarily valuable tool.
A seller’s document tells prospective buyers about your business and why they should buy it. A good one will contain, at the least, a brief history of the business, financial highlights over the past few years, observations about your local market, prospects for growth and a frank look at the competition.
While large businesses often create elaborate brochures with glossy photos and lengthy chapters, most pet retailers need not go to such lengths. A two-page summary that is neatly typed and grammatically correct often is enough. The content is most important. If you engage a business broker to sell your business, they will be able to help you prepare your seller’s document.
How can you tell if your seller’s document will do the job?
“A good seller’s document will answer 80 percent of the questions that a prospective buyer is likely to ask,” Marsh said.
6. Decide What You Will Tell Your EmployeesFor a variety of reasons, many sellers are reluctant to tell their employees that the business is up for sale.
“In my view, that’s a mistake,” Marsh said. “They’re going to find out eventually. In fact, it’s almost impossible to keep employees from knowing that a business is for sale. When they eventually find out, resentment is certain.”
Petrecca agreed that employees should be informed about plans to sell the business.
“If they find out from anyone other than you, you will almost certainly lose their respect and loyalty,” Petrecca said. “That, in turn, could influence prospective buyers.”
According to a report published recently by the Associated Press, top employees often turn out to be the buyers of businesses for sale. By letting your employees become the first to know about your plans, you might wind up with a buyer right in your own backyard.
7. Consider Professional Help
Even if you find a buyer on your own, it’s important to remember that it’s quite difficult for the typical business owner to place a realistic price on their business. Experience suggests that using a professional business broker to sell your business is likely to bring the most satisfactory results, including the best net return for you.
Even if you find a buyer on your own, it’s important to remember that it’s quite difficult for the typical business owner to place a realistic price on their business. Experience suggests that using a professional business broker to sell your business is likely to bring the most satisfactory results, including the best net return for you.
However, you might be reluctant to pay a broker’s fee. If you intend to put your business on the market without the services of a broker, you need, at the very least, a good accountant and a good attorney. Both should be experienced in business sales.
The sale of a business, even a very small business, is a complex transaction rife with potential frustrations and legal pitfalls. Marsh summarizes it this way: “If you’re like the great majority of business sellers, you’ll do the job only once in your lifetime. That means you need to get it done right the first time.”
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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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