When you pick up a book on “Selling A Business” do you immediately turn to the chapter on business valuation?
“How much money can I get for my business?” Isn’t that always question #1?
And whatever dollar amount we come up with, that number usually dominates our thinking from that moment on.
And that type of thinking usually causes problems for the seller. In talking with sellers I find that most have a nice round figure in mind that they hope to collect upon selling their business.
In 15 years of running TheBizSeller.com we have consistently found that about 70% of owners who list with us demand cash for the business -no owner financing.
We also know from experience (as well as information published by BizBuySell and from talking with brokers and advisors ) that about 70-80% of the deals that actually get done include some degree of seller financing.
How Demanding Cash Shrinks The Market For Your Business
For the sake of illustration lets pretend you want to sell your business for an even $250,000.
This means you will have three types of prospects – Those with exactly $250,00, those with less than $250k and those with $250k and more.
If demand cash you immediately eliminate all those with less than $250k. For owner-operated businesses this is the category most buyers fall into.
But you also eliminate all those with exactly $250. It takes more than just the purchase price to buy a business. Additionally, a buyer needs to money fees for advisors/accountants/lawyers. And operating expenses for at least the first six months. And as much additional cash as possible as a cushion in case things go wrong in those first few months.
The smart, qualified, successful prospect with $250,000 in savings will likely only consider businesses they can get into for $200,000 or less.
The buyer with only $250,000 in available cash will not – can not – buy your business.
That leaves prospects with more than $250,000:
Of all the potential business buyers out there, this is the group where you will have to find your buyer.
But this is where it gets complicated.
Because you are not competing just with the other businesses that are for sale for $250,000. You are also competing with all the $400,000 business where the owner is asking for 60-70% down.
And you are competing with all the businesses priced at $500,000 where the owner is asking 50% down.
And you are competing with all the $750,000 where the owner wants 33% down.
The buyer with $250,000 to invest is going to look at all the other business that they can get into with their $250,000. Not just the ones priced at $250,000.
If you were in the buyer’s shoes wouldn’t you try to leverage the money you had to get into the biggest, most profitable business you could?
The bottom line is that demanding all cash reduces the size of your prospect pool. And your most important job as the seller is to try to create as large a pool of prospects as is possible. Demanding all cash actually works against your goals and interests.
In the world of buying and selling small businesses there exists an unfortunate situation.
It is almost a cliche these days to see articles about selling a business that say things like, “ to sell your business you must start to prepare at least two years in advance”. The author will then list the things you must do to get your business ready. Activities such as “increase sales” or “cut costs” or “get your financial statements in order”.
It is as if good business practices only come into play once you’ve decided to sell.
Wouldn’t you agree that cutting costs, increasing sales and having organized financial statements are important even if you are not selling your business?
A business that consistently grows sales, cuts cost and has its finances in order seems like a great business to own.
Why would you wait until you want to sell to build that type of successful business?
Stop Preparing And Start Building
The best way to “prepare” your business for sale is to build a business worth buying. Of better yet, a business worth owning. If your business is not providing you with a nice income it is going to be hard to sell it for any price.
The statistics on selling a small business are discouraging at best. In his book “The Complete Guide To Business Brokerage” Tom West states that a successful brokerage will need 5-6 listings to generate one sale. In my 15 years of working on the for-sale-by-owner side I can tell you the success rate is about the same for those who sell their business on their own: about 1 in 5 businesses put up for sale actually get sold.
And the reason for this low success rate has nothing to do with preparation.
If getting your books in order and hiring an accountant to help with valuation where all that was needed, every business would get sold because every business owner completes these obvious steps.
Here is the thing that is missing from most discussions about selling small businesses: The Buyer.
Sellers are usually so focused on their wants and their dreams of an easy retirement that they often treat the buyer as an afterthought.
Would You Give Your Life Saving To Own A Business Like Yours
But ask yourself this: why would anybody give you their life saving for the chance to take over your business?
Two things must happen for a buyer to invest in your business:
1.) They must have a reasonable expectation that they can maintain your level of success once you are gone.
2.) They must view your business as being a better investment than all their other options. (And never overlook the fact that the option to do nothing is always available to the prospect.)
Let’s focus for now on item number one: the buyer must have some reason to believe they can continue your level of success once you are gone. The reason this is such a big problem is that many small businesses are totally dependent on their owner for their survival.
To sell your business you must create an organization that can exist separately from you.
For most small businesses these three steps will be the most effective ways to do that.
1.) Remove Yourself From The Sales Department
If you started as a one-man show then chances are you are a good salesperson. Early on that was probably necessary.
But now you want to move on.
And no buyer wants to own a business where all the customers are doing business with the owner for personal reasons. Rightly, the buyer will ask – what is to stop these customers from leaving when the founder leaves?
Founders and entrepreneurs can be great, passionate sales people. But when I buy your business I just lost my best salesperson.
And worse yet are those cases where the owner is the only salesperson.
This is especially dangerous in small service businesses like web design, graphic design, real estate inspections and the like. It is common in these type of businesses for the owner/founder to also be the only salesperson.
If most of your new business comes to you because of your own personal sales efforts, then anyone who buys your business is actually buying a sales job, not a company.
Businesses that are nothing more than a self-employed person have little to sell except a customer list and maybe some training.
Worse still, I may fear that customers were doing business with you personally, not the business I am about to buy.
Your job as an entrepreneur is to build the business, not make individual sales.
2.) As Much As Possible, Remove Yourself From The Rest Of The Business Too
Now that you have fired yourself from the sales department, fire yourself a few more times.
If the Standard Operating Procedure at your business is that you handle every crisis and you put out every fire; who will do that thankless work once you are gone?
Most likely the new owner. In fact it will have to be the new owner because his new employees don’t have any experience or expertise handling problems – you were always the one handling them in the past.
Who wants to buy into that situation?
If you are the chief cook and bottle washer who will do those odd jobs when you’re gone?
And if you put out all the fires because “it’s just easier that way”, then no one will be left who does know how to handle these things.
The new owner will not be taking over an existing business but will burdened with everything that in the past fell on your shoulders by default.
One very simple thing you can do is give your employees more freedom to solve their own problems. The next time an employee comes to you with a problem don’t immediately go to work fixing it for them.
Instead, ask them how they would solve this issue if they owned the company. If they give you a solid answer you can then let them go ahead and implement that solution. If that is not possible at least you have got them in the habit of thinking about solutions on their own.
3.) Create A Written Record Of What Works ………. And What Doesn’t
I originally titled this section “Have A Set Of Written Policies And Procedures” but that sounds really hard to do and really boring.
The reality is that few small business have the time to created a detailed policies and procedures manual. And I am not suggested you create some dense, monotonous manual that dictates how every single activity be done.
But it would be of great value to a buyer to have a written record of what has worked. And what hasn’t.
You probably use the same key words and phrases when prospecting for customers or closing a sale. You probably ask the same questions of applicants when hiring new employees.
Put that sales script down on paper. List the interview questions that you have learned are the most effective and informative.
It has taken you years to learn what works and what doesn’t. Take everything you know about running your business that is in your head and put it down on paper. This is the value the buyer is paying for.
And it is of great value to you also. Remember you can only sell your business if the buyer believes in his mind that he has a reasonable chance to continue your success.
Franchise companies are the masters at selling businesses. As an industry, their success rate is inspiring. And one reason they can sell so many businesses – and do it at a premium price – is that they document all the steps to success.
To whatever extent you can, you should put your formula for success on paper too. It will set you apart from the millions of other small business that are for sale.
No one wants to pay you their life saving so they can learn by trial and error. If they wanted to do that they would just start their own business from scratch.