As we work with people selling their businesses over the past fifteen years, we have come across a number of “myths” that people believe that aren’t true. As Mark Twain once said, “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.” We want to explore the five most common myths that business owners have when they think about selling their business.
- Selling my business myself – I can do it
- Manna From Heaven
- I know what my business is worth
- I’ll sell my business when I am ready
- Selling my business is like selling a house
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Myth #1 – Selling My Business Myself – I Can Do It
Many owners act as key salespeople for their company. But selling your business is not like selling a product or service. If you try to sell your own business, confidentiality is lost. You risk losing clients and employees – the very goodwill you are trying to sell!
In addition to confidentiality, time is also an issue. Do you really have the time to recast your financial statements, create marketing materials, advertise, screen buyers, give tours and facilitate due diligence all while you are running your business? Industry statistics suggest fifty to a hundred buyers inquire about a business before it is sold, and only 2% of buyers actually wind up buying a business. There are a lot of tire-kickers out there!
As well, if you have a solid, profitable business, and if you know some “for sure” buyers, using an intermediary (broker) can help add value, because they can run an independent, professional “auction” sale process. We have seen this many times, where we represent a seller, we approach the potential buyers the owner knows (and others we know), and we get 50% or more than what the owner thought he would get, based on the original discussions he had with one or two.
Myth #2 “Manna from Heaven”
I talk to a lot of owners who just assume there is a large pool of buyers out there for their business, and they further assume the buyers are rich and will pay top dollar for their business. Many times, a business owner says to me “call me when you have a rich buyer prepared to pay double what it is worth, and then we’ll talk.” [Well, they may not use those precise words, and we will discuss valuation later, but you know what I mean.] What they are really hoping for is a synergistic buyer, perhaps a competitor who is looking to grow through acquisition, and is willing to pay more than “fair market value.”
Yes, it happens. However, there are three key issues: it may not happen in your industry, it may not happen when you want it to, and your competitors may be more interested in buying your client list than your equipment (or hire your staff, which creates severance problems for you). If you are serious about retiring, or selling your business on your timeline, you need to take action – not wait for a call out of the blue (that may or may not happen).
Myth #3 – I Know What My Business is Worth
Some owners will base the value of their company on what they need to pay off their debts and what they need for retirement. Others will tell you they want $1,000,000 for “sweat equity.” Still others use industry multiples, or what their friend sold for last year.
Value is typically based on cash flow times a multiple – the issue is which definition of cash flow, and which multiple! You might hear “business owner X got a 5x multiple” but you need to know what it was a multiple of, and what was included (or not). Valuators look at EBITDA, EBIT, Discretionary earnings, Cash flow, free cash flow, etc. etc. Multiples may include inventory and working capital, or they may not. They almost never include real estate – how was that treated? Ensuring you understand valuation metrics and how they work in your industry is vital to ensure you get fair value for your business.
Myth #4 – I’ll Sell My Business When I turn 65
Three things need to align for an owner in order to maximize value upon sale:
- The owner needs to be ready
- The business needs to be prepared
- The market needs to be strong
An owner really only has control over the first two. They can prepare mentally and emotionally, and they can start preparing the business. But personal and business readiness are just two of the three factors. Economic factors can have a significant impact on the sale of a business and the price you get.
Sale prices can be affected by industry consolidation, interest rates, unemployment and many other economic measures. You may want to consider selling when the time is right – not necessarily precisely when you turn 65, or at a certain month in the year. The other factor is the amount of time it may take to sell your business – each business is unique, each seller is unique, and each buyer is unique – it can take anywhere from six to eighteen months to sell a business. Talk with a professional and aim to sell when your personal goals and market conditions align.
Myth #5 – Selling My Business is Like Selling a House
Probably the biggest myth I come across is the house-selling myth. People are surprised when I discuss the process, and especially the timelines involved in selling a business. As I like to say – even if we had a buyer today for your business, we are 3-6 months away from closing that transaction.
Preparing to sell your house may take a few weeks, then you want to get the word out to everyone that the house is on the market. Once you get a satisfactory offer, you sign on the dotted line, turn over the keys and move on.
Selling a company is much more complex. A successful business sale usually requires a great deal of planning, possibly up to a year in advance. It may take as long as three years to drive sales, develop key staff, document the operations and control expenses.
The average house will sell in less than four months, while the average business takes nine to eighteen months. Even after the business is sold, the seller can be expected to put in at least a few months, and possibly a year or so of transition time, helping to make the new owner a success. Sound sale strategies will get you the optimum return. Go to market with realistic expectations by getting a professional valuation and using a professional business broker.