Last month we published a 55-page Special Report entitled What You Need To Know Today If You want To Sell Your Business Tomorrow.
In the report we introduced a new definition or category of small business – The 1-20’s.
A 1-20 business is one that does 1 million or less in sales, has 20 or fewer full time employees and is owner-operated.
The fact is that the term “small business” has become meaningless. The media and politicians use it to describe pretty much any business that is not trading on the New York stock exchange. If it is smaller than Exxon then they call it “small business”.
The 1-20 category of business has surprisingly little in common with what passes for “small business” in our media and culture. Especially when it comes to the topic of selling that business.
That is why I felt it was necessary to create and name this category.
Spend a little time observing the networks and cable news channels. Big publications like the New York Times, and highly regarded business publications like Forbes and Inc. Magazine. When they cover the topic of small business they are rarely focused on companies that are small enough to fit the 1-20 category. Even if they say their topic is “small business”.
How to sell your small business – always keep size in mind
And when they cover the topic of buying or selling a business the are never talking about the 1-20s.
Even blogs and publications that claim to be about all things small business they usually focus startups, especially tech startups.
But coverage of traditional, mainstay small businesses – restaurants, retail shops, service businesses that serve a local clientele – is lacking to say the least.
When the coverage of small business makes no distinction between the $25,000,000 small business and the $500,000 small business people get the false impression that these two businesses have a lot in common. They don’t. The owners operate in two different worlds. Talking about these two businesses as if they were the same would be like claiming earth and Jupiter are the same because they are both planets.
Why The Status Quo Sucks For Small Business Owners
As a result most people have a very inaccurate idea about the reality that the owner of a 1-20 business must deal with.
If the goal of owning and operating your own small business is to create financial security and maybe even a little affluence, then things are not going too well.
Certainly, small business ownership has its perks: independence, pride of ownership, seeing your creation grow into reality. And yes, you can even make a decent living by working 6 or 7 days a week and risking all your savings just to get into the game.
But if the ultimate goal is to eventually sell the business. And pocket a life changing amount of money. Well, that rarely happens for owners of smaller businesses.
And for most, it is selling the business that is the one big payday. For most entrepreneurs in the 1-20 category, yearly income may be good and stable but not extraordinary.
And when it comes time to sell these owners face an uphill battle:
- About 80% of small businesses put up for sale never sell. And this is the case whether you hire a broker or go the for-sale-by-owner route.
- Most owners have an inaccurate idea about how their business should be valued or priced. mainly because our understand of valuation is based on what the media covers and as we have pointed out the 1-20s are mostly ignored. According to BizBuySell, in 2014 those minority of truly small businesses that sold (again most don’t, so these companies are the exception) had an average selling price that was equal to 1.94 times annual owner’s discretionary cash flow(SDE or Owner’s Benefit). According to PitchBook “mid market” businesses (those with $5-20 million in sales)sales sold for an average of 10 times earnings in 2014. This is where the Smaller-Than-Exxon phenomenon kicks in. The media considers the 1-20 type business “small” but they also refer to the mid-market business as “small”. (Here is the perfect example of an uninformed member of the media wrongly grouping both business types together.)Is it any wonder then that owners of truly small business (The 1-20’s) get the false expectation that their business can be sold for 5 or even 10 times its earnings?
- One reason valuations are at the 2x earnings level for the 1-20s is because for small businesses the market is local. It doesn’t matter how successful your business has been. If you can’t find a qualified and motivated entrepreneur within your local area you can’t sell it – for any price. This is not the case for the larger companies that get the media’s attention. The law of supply and demand still applies when you try to sell your business. and demand is limited to a very few – if any – members of your local population.
- Except for the owners, everyone involved with buying and selling of businesses – brokers, lawyers, accountants – is doing great. Brokers plan on only selling 1 out of every 5-6 businesses they list. They can be very successful with this batting average. In other words, their success does not depend on your success. And this is another instance where the media misleads business owners. Every business publication is currently running stories and blog posts about how now is a great time to sell. Business transactions are at a record level. And all that is true. But it is also true that 4 out of every 5 owners who try to sell still fail. If you are broker, M&A consultant, acquisition lawyer or accountant things are much better today than they were 2 or 3 years ago. But if you are an owner trying to sell, your adds of succeeding haven’t changed.
And that is where things stand for the owner of a truly small business.
The reality about low success rates is rarely acknowledged in our media or the culture at large.
Our understanding of valuation is based mostly on much larger companies.
And the people who are supposed to help owners sell do very well even when the seller does not.
That doesn’t mean you can’t successfully sell your business. You can. But only if you take complete control of the situation. (This is one reason why we only deal in for-sale-by-owner businesses here at TheBizSeller.com).
No one else cares as much about your success as you do. And no one else has anything at stake when it comes to your success. Only you.
To sell you must understand how your business is valued and what will motivate a entrepreneur to invest his or her life savings. And you must understand the realities of the your local market that exist for your specific business.
And that is what we cover in the What You Need To Know Today If You want To Sell Your Business Tomorrow. If you are not making the progress you had hope for with selling your business please download this report. Give yourself 20-30 minutes to read through it. I promise you’ll find at least a few pieces of information, advice or perspective that will help you situation.
And if you have any question or comments after reading through the report please post them below where we can discuss it.
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