How to Sell Your Business for Your Price
Sooner or later, the day will come when you are no longer running your fast lube business. Whether you decide to pack it all in and retire to sunny Florida or whether you just want to cash in on all that hard work while you are young enough to enjoy the fruits of your labor, choosing the right selling strategy will be critically important especially in a challenging economy such as the one we are experiencing now.
After a decade that saw business sellers calling their own tunes, the economic meltdown of 2008 ushered in a precipitous drop in business sales, mergers and acquisitions. The year 2008 was the worst in recent times according to Bryan Adams of FactSet Research Systems Inc.
“Clearly the second half of 2008 stands out as the bottom, where the market essentially collapsed,” Adams said.
Bernie Siegel of Siegel Financial Group said, “I believe the small business market has bottomed out and the worst is behind us. The poor economy of the past couple of years has resulted in many potential business sellers holding off. The result is a pent up supply of potential buyers.”
“I feel that an owner putting a business up for sale now will find 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 cashflow business, you should be able to find a suitable buyer.”
Make sure that it’s the right time for you.
“I believe a seller should choose to sell the business when it makes personal sense to him or her,” Siegal 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.”
While this may or may not be the best time to put your shop 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 Cinderella to market and not an ugly duckling:
· Plan Ahead
Business intermediary Dick Marsh of R.H. Marsh Associates in Jenkintown, Pennsylvania, said, “Last minute, emotional decisions to sell a business seldom end up with a satisfactory sale. 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.”
Our 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 a good 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 calls for 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.
· Keep a Realistic View of Your Business’ Value
It’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 the business.
Realistically, your potential buyer doesn’t care at all about your emotional relationship with your shop. A buyer has one interest above all others: Can I make this business a success, and what return can I expect from my investment?
That’s why you need to divorce yourself from emotional considerations and look at your shop from the viewpoint of a cold-hearted buyer. Any business broker can tell you stories about sellers who place 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 $350,000 that is worth $200,000, not only is not going to happen, but it can result in real damage to the business. Over my 27-year career as a broker, I have witnessed how unrealistic expectations have had terrible results.”
Marsh offered 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 reevaluate.”
· 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.
A prospective buyer or his accountant won’t be satisfied with claims that your business is actually 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 may or may 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.
Business broker Herman Petrecca of Business Connection Plus in Warminster, Pennsylvania said, “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. 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, the experts said.
“Make sure your last couple of years of financial reporting are meticulously accurate,” Siegel said, “and be prepared to validate any financial claims.”
Paperwork may 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.
· Don’t Drop the Ball
“It’s not uncommon,” Marsh said, “for a seller to neglect the business once it’s been put up for sale. 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 shop 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.
· Prepare a Seller’s Document
“Seller’s document” may be a phrase that you haven’t heard about, but when you decide to sell your business, it can be an extraordinarily valuable tool.
Briefly, you create a seller’s document to tell 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 and prospects for growth, and a frank look at the competition.
While large businesses often create elaborate brochures with glossy photos and lengthy chapters, most lube shop owners need not go to such lengths. A two-page summary neatly typed and grammatically correct is often enough. Most important is the content. If you engage a business broker to sell your business, she 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 a prospective buyer is likely to ask,” Marsh said.
· Decide What You Will Tell Your Employees
For a variety of reasons, many sellers are reluctant to tell their employees the business is up for sale.
“In my view,” Marsh said, “that’s a mistake. 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.”
Sometimes it’s a good idea to put yourself in the shoes of your employees.
“You should inform your employees about plans to sell the business,” Petrecca said. “If they find out from anyone other than you, you will almost certainly lose their respect and loyalty. That, in turn, could influence prospective buyers.”
· Another Reason to Tell Your Employees
According to a report published 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 may wind up with a buyer right in your own backyard.
· 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 his 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 may be reluctant to pay a broker’s fee (typically 8 to 10 percent of the first $1,000,000, scaling downward after that). 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 summarized 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.”