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How To Sell A Business, A Reprise

How To Sell A Business by Bill Roberts

As a Business Opportunity Broker, I found it useful to write a book on “How To Buy A Business.” This article is a distillation of some of the main points of that process as affects a broker selling businesses.

The first thing a Business Broker needs to do is interview the seller. Keep in mind that 90% of businesses put on the market DO NOT SELL.

The seller needs to be motivated and reasonable. Find out his motivation. Keep digging until you are sure you know why he wants to sell. Most businesses put on the market are losing money, or are about to.

What is the prognosis for the neighborhood? What about competition? Find out about key personnel. If somebody is leaving or has left and took a big chunk of the business with them you know why he is selling.

Don't accept as a reason that the owner is tired and needs a break. Of course he's tired. Nothing wears you down faster than a failing business.

After you are satisfied that you know why he is selling, you can move on to discussing the business. All sellers lie about how much business they are doing. I suggest taking an oblique angle on them.

Ask how much business they generally do on Wednesday. Repeat this for the other days of the week. Determine which day is their busiest day. Find out their slowest day.

The Pro-Forma

You are going to construct a pro-forma financial statement.

You are going to make up the numbers. You have to be a detective. Start by constructing a typical week, then a typical month. Because ALL sellers lie, these numbers will be better than you could get from the seller.

Whatever you do, don’t accept the seller’s P&L. If you don’t know the actual numbers, you can honestly say you don’t know. You absolutely don’t want to be put in a position of representing the business to be in a certain condition, because if the buyer finds it to be otherwise it is you he is going to come after for misrepresentation.

Tell the buyer you don’t know, but this is what you think it might be. Make him make his decision based on his own DUE DILIGENCE.

Price The Business

Now you have to price the business. That's a subject too big to adequately discuss here. However I will give you some basic guidelines. Small businesses doing less than $2,000,000 in annual sales are generally worth about two times the NET PROFIT plus the value of fixtures, equipment, and inventory.

Maybe the business has NO net profit but it has a good location, or it has an exclusive product, or the current management has run it down, or some other reason that it deserves special consideration when it comes to pricing. Don't just accept a price that the owner says he wants.

Over priced businesses don't sell (at any price). You are not serving your client by taking an over-priced listing.

The Listing

Write your listing for at least six months, but try to get a year. It takes time to sell a business.

You should only accept an EXCLUSIVE RIGHT TO SELL listing. Open listings and exclusive agency agreements lead to NO COMMISSION. Protect yourself.

When you get a “nibble” on this business, it will be your job to “qualify” the prospective buyer before you let him know anything about the business including its name or address. A lot of people who have no intention or ability to buy a business want to know everything about your listing. You owe it to your client (the seller) to tell them nothing.

If you are serious about selling businesses, you need to know that it is a lot more work and takes more “skill” than selling general real estate, and generally pays less. You do it because you love it and you are good at it. No other reason!

For help in buying or selling a business, contact Bill Roberts (619) 244-4610.

Posted by Bill Roberts - "Baby Boomer" Retirement Planning on 01/01/2008 06:26 PM

Comments (25)

bill roberts real estate, business opportunites, buy a business, sell a business

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25 Comments on How To Sell A Business, A Reprise

JAN

2008

Bill, that is a very good post. I have a few business and your post is soooo right.

Vicky, Thank you very much.

Bill Roberts

Bill,

Interesting post. I work with Richard Parker who created a kit for people interested in buying a business. Here is a link to the product http://www.trumpuniversity.com/products/art-buying-business.cfm.

Your post added some perspective to the work we do at Trump University and reminded me that there are two parties to this business transaction. You also gave me an idea on how to market this product in a different way.

Thanks

Josef, Glad to be of help.

Bill Roberts

Bill: I know of a few people who made a lot of money in the real estate boom. Oh, the power of money. People get money and then all of a sudden, they are experts at mergers and acquisitions and buying businesses. One person I know bought up some businesses from just looking at the owner's hand-scratched p&l. Of course, only one of the businesses is making any money but not enough to finance the other three or finance the debt. You see this quite a bit of this from people who win the lottery. They're just throwing money in the air like they can go out in the back yard and pull some more off the money tree.

Good advice on listing. I went to a convention not too long ago and the speaker talked about listing agents talking too much. Remember the song "You Talk Too Much, You Just Worry Me To Death". Your advice about not saying a word until you get them qualified makes great sense.

Interesting post and great advice.

HAPPY NEW YEAR !

Jan, Thank you. Most of this I learned the hard way. Buying a business can be hard for the buyer, but it is equally hard for the broker. It is a lot like fishing. You can't make too much noise and you better be sure the fish has taken the bait before you start reeling him in.

Bill Roberts

Bill,

Good post.

Would be buyers often get taken by sellers or the lucky ones have the sale fall through, losing only their earnest deposit.

Good business brokers are worth their weight in gold, often their services are worth more than the business. Especially those acting as a buyers broker.

I like your realistic approach to the value of small business. I would warn that "net profit" is after the cost of management, so many people buy a job thinking they are investing. There is nothing wrong with buying a job, for some people it's the only way to keep one, but it is not investing! If you can make $20.00+/- an hour at your current job, you can't afford to stock shelves or act as a bar-back.

Seller's are indeed liars. I never meet one in a cash business that didn't tell me that they make a lot more than the books show! They normally do this in the first hour often in the first 15 minutes. I'm suppose to believe they cheat the IRS, but they're telling me the truth. Get several years tax returns and the forms signed to verify them with the IRS, no verification no deal, save your time and money!

Get the bank records and account's report, just don't believe them! Understand both the bank and the account may believe them!

The closest to honest business is a farmer, but they never consider their own time. Take Prozac before talking to a nursing home owner or director.

I'm not sure about it being a lot more work, but I'm not sure what "general real estate" is, this is not home sales!

Happy New Year!

Bill

William J Archambault Jr

The Real estate Investment Institute

PS: I like your last line

"For help in buying or selling a business, contact Bill Roberts (619) 244-4610."! I agree hire a specialist! I would and I teach them.

Great advice! Especially about not taking an overpriced listing. I actually told a seller earlier this week that if they wanted to price it above $X, I would rather be their second agent. I will sell it after it sits on the market for a while. That got her thinking. Today I spoke with her & next week I'll be listing the property at a price that should get it sold.

Over priced businesses don't sell (at any price). You are not serving your client by taking an over-priced listing.

Bill, that's great advice for real estate listings as well. You are not serving the client by taking an over-priced listing... and you end up wasting money and time trying to market the turkey because it won't sell.

Thanks for your insight on business transactions. 90% don't sell. Seems high at a glance, but it makes sense when you think about it. Owners typically don't sell successful business unless that was their exit strategy.

Frank Jewett

Wow- great post! Thank you so much. I don't do Business Brokerage- I am happy to say I know at least one really good Broker in the area, so I can refer out.

JAN

2008

Bill- Thank You for the heads up. I will probably stay away from these.

Bill A. Thanks for your thoughtful comments.

As you noted, many if not most small businesses are nothing more than a job for the owner. That is not to say they are without value. Even if the business has no net after paying the owner to manage and run the business it still has value. How much value is strictly up to the prospective buyer.

I insist that all buyers do DUE DILIGENCE before we even open escrow. After we have an accepted offer which is nothing more than a LETTER OF INTENT the seller must show and tell all. Sometimes the buyer will even have an observation period. This is particularly useful in cash businesses like dry cleaners. Only after the buyer is completely satisfied do we open escrow. Lease assignments, license transfers, creditor notices, and UCC checks all take place during escrow. If everything was done right before openning escrow, escrow should close.

Bill Roberts

Jen, In most things over-priced doesn't work, but it especially doesn't work in business sales. Closing a business sale is very difficult. Many thngs come up during the transaction period which can derail it. Too high of a price is the first thing. There is generally no recovery from this.

It is a real problem because there are no "comps." All sellers want too much for their businesses.

And it should be noted that most businesses offered for sale have a problem. That is whty they are for sale. A business with no future has little or no value regardless of how much money it made in the past.

Thankn you for commenting.

Bill Roberts

Frank, The failure rate on business sales is a function of not setting the transaction up right from the beginning. Price is a major issue. A buyer doesn't really have any idea what a particular business is worth at first glance. It is not until he has had an opportunity to get "inside" the business that he can assess the true value to him.

One of the problems comes about because the seller might think he has a "contract" after he accepts an offer. This might be true in house sales, but it is far from true in business opportunities. There are too many unknowns that can only be learned during the DUE DILIGENCE period. A transaction that is not "shepherded" by an experienced business broker will surely fail when the sellers lies see the light of day.

Thank you for commenting.

Bill Roberts

Sarah, Good strategy! Thanks for commenting.

Mark, You too. Find a business broker in your area that you have confidence in and refer your clients to him. Everybody wins this way.

Thank you both.

Bill Roberts

Bill, thanks for the insight of selling business. A great point you make is the length of time.

Frank, thanks for commenting.

Bill Roberts

JAN

2008

Good job, Mr. Bill Roberts!

Over the years, if a business owner caught me when I was bored, I'd consider listing his business.

My favorite statement was always, "The bottom line doesn't look so good, but it's because I charge a lot of personal stuff to the business and I don't ring up all of the sales. I pay too much tax now."

As soon as he'd say that junk, I'd tell him I didn't want to list his business, but I'd leave out the part about me not working for thieves.

Bill

Bill Cherry, Thieves or liars? I guess it really doesn't matter which because they are surely one or the other.

But if I didn't work with liars I couldn't sell businesses because all the buyers and sellers lie a little bit. It's like a game to them.

Thanks for sharing your experiences.

Bill Roberts

You lay this process out so clearly and concisely, Bill! Well said! My husband's dream was to get under his own shingle, and we discovered the lessons you set forth so prophetically - but in the school of hard knocks. Thankfully, our lessons were learned BEFORE we got too far in to any business purchases, and we dug deep in to any business we were considering. We were amazed at how many sellers think it is okay to falsely represent their businesses. All worked out well in the end when we not only found a great business broker who worked out the transaction for the window/door store my husband operates, but have become good friends with this gentleman an his wife.

Karen, I'm glad your story has a happy ending. Too many don't. A lot of unhappiness and lawsuits could have been avoided by utilizing the services of a knowledgeable broker.

Bill Roberts

Bill- We also have the prospects sign a confidentiality agreement with us as the sellers usually do not want their customers to know their business if for sale. I would never take a listing less than one year on a business. It is a lot of work and you have to have a thick skin to sell businesses. Not the same as selling houses where a big heart goes a long way! Katerina

Katerina, I only use my Confidentiality,Non-disclosure Agreement after I have an LOI. Until then the buyer isn't given any information about the business except the name and address.

Bill Roberts

JAN

2008

I have specialized in selling marinas and they are very difficult to valuate because there is a premium on the license itself and the waterfront real estate. Generaally we use a normal business formula and then add according to location. I'd love to be able to narrow it down further but even the appraisers have difficulty with this. Comparables run so high compared to replacement or cash value that they are often overpriced but yet they still sell.

Gayle, I'm glad to make your acquaintance. Unique properties and businesses are always difficult to evaluate, but the buyer sets the price in the final analysis. I have a group All Land where you can post your listings and articles about what you do. We would really welcome your input.

Thanks for your comments.

Bill Roberts

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