The Truth About Selling Businesses that They Don’t Tell You
What aren’t they telling you? Our friend Clinton Lee from the The Exit Firm shares some truths that every small business owner needs to understand. (For those that don’t speak UK remember some of the symbols are different, but truth is truth.) Original article here.
The Truth About Selling Businesses That They Don’t Tell You
Selling a small business is a lot more difficult than most people realize.
Business brokers (and business-for-sale listing platforms) give the impression that selling is a breeze. Brokers often make out that they have a very high success rate. Business-for-sale listing platforms give the impression that all you’ve got to do is list a business in their marketplace and before long you’ll have found a buyer and closed a sale.
However, none of that is true. Overall, 80% of businesses that go to market do not find a buyer. And when it comes to small and micro businesses, the stats are even more sobering. Well over 95% of these businesses do not find a buyer!
And when a small business does find a buyer, the chances are that it will not be at anywhere near the price the owner was expecting (though there are things the owners can do to improve the price).
Some truths below.
1. Buyers wear grey tinted glasses
2. It’s not just a matter of knowing the right people
3. You’ll probably have to lend the buyer money
4. It takes longer than most people expect
5. Due diligence can become a full time job
6. Legal & accountancy fees can leave you seriously out of pocket
7. Buyers don’t give a damn about your valuation.
Whatever your opinion of the attractiveness and potential of your business, the chances are that no buyer is going to recognise that! This is the where most small business owners get their first whack of reality. Buyers believe that you’re seeing everything with rose tinted glasses. And you may come to the conclusion that all buyers are viewing your business with grey tinted glasses.
The perception gap can often be huge.
It’s often the case the vendors believe they have the ideal business that is highly attractive and would be easy to sell.
“It’s so good, it sells itself. You just need to let the right people know about it.”
That displays a naive ignorance about how difficult it is to sell a business.
Buyers don’t make these decisions on a whim. Prior to approaching a buyer you (or your business broker / M&A adviser) need to prepare extensive documentation; get the accounts and tidy up flaws or areas that won’t stand up to very, very detailed scrutiny; prepare documentation; put together an Information Memorandum (IM); collect the huge pile of documents that buyers normally ask for etc.
That takes more than 10 or 20 hours. It could take well over 100 hours!
This time investment is required whether you’re selling the entire business or only some of the major asset/s of the business. It takes the same amount of preparatory work whether you’re selling 100% of the shares or 50% of the shares.
You then seek buyers out in a number of different ways… but getting buyers is just one small piece of the puzzle. It takes a lot, lot, lot of work to coax a buyer from the point where they sign a Non-Disclosure Agreement to the point where they invest time and money to assess the business and come up with an offer. Right at the start if you don’t have the accounts tidied up, don’t have an IM, don’t have other key documents … serious buyers will not bother wasting time with you.
Why? Because it costs them time and money to assess the opportunity. And there’s no point engaging with slovenly and poorly prepared vendors.
Getting to the offer is a big deal. The offer itself is not a single number but it’s a multi-page document with many clauses and conditions.
But for the owner (or the broker / M&A advisor), getting an offer is not even a half-way point. There is further negotiation to be done on the numerous points in the offer. The buyer then goes into due diligence (DD) and uses his accountants and lawyers to examine everything in the business with a fine tooth comb. This is an arduous process and costs both the owner and the adviser many days or weeks of full time effort. Yes, full time (more below).
Even after all that effort, nothing is guaranteed. Buyers can, and do often, pull out during DD and then the vendor (or broker) needs to start from scratch and give it another go.
There is nothing that winds a competent adviser up as much as a vendor who dismisses the effort involved and thinks that it’s just a matter of making a few choice phone calls.
When selling a business in the £1m – £5m range, the average vendor (or his adviser) will spend 200 – 500 hours on the sale, will make hundreds of phone calls, reply to hundreds of emails and spend much time and expertise to coax a buyer along to the point where they actually make payment.
You’ll probably have to finance part (or all!) of the purchase price. The higher the price of the business, the greater the chance that the buyer will expect a “seller’s note” ie. credit.
What does that mean? It means that you’ll probably have to lend the buyer money to buy the business from you!
Huh?! That can’t be right, surely?
Unfortunately, it’s true. Most buyers will want at least part of the purchase price to be deferred. So once you’ve agreed a price they’ll probably want to pay just part of it now and spread the rest of the payment over the next 2-3 years.
There are two reasons for this. The first is that the buyer has less money at risk (and it may even be that he doesn’t have the funds to make a full payment). The second is that he believes the business is more likely to do well in future if you have a continued stake in its success. If part of the price is going to be paid in the future, and if that payment is contingent on the continued success of the business, then that’s a further risk reduction for the buyer and motivation for you to help the new owner make a success of his acquisition.
You don’t like the idea of giving him a loan? You insist on being paid in full up front? If so then you’ll probably lose the best buyers and will have to be willing to accept a much, much lower price.
It Takes Longer than Most People Expect
Vendors often list a business on one of the popular platforms and expect the enquiries to come pouring in.
After all, it’s a fantastic business with a lot of potential!
Except that enquiries don’t come flooding in. They trickle in over days, over weeks, over months, sometimes over years before a business is actually sold!
And taking a potential buyer from an enquiry to signing a contract to buy the business is a long process. Most buyers drop out along the way.
So whether you’re selling your business yourself, or using a business broker, once the business is on the market and advertised at the usual locations, don’t be surprised if you don’t get a huge surge of interest from potential buyers.
In the first month of listing at somewhere like Daltons Business or BusinessesForSale, the average small business gets fewer than half a dozen enquiries. Most of those potential buyers won’t even complete the Non-Disclosure Agreement (NDA) to get to the next stage.
Due Diligence Can Become a Full Time Job
Answering questions from buyers can become a full time job.
Vendors rarely appreciate just how detailed the legal and accounting due diligence can be. Even if dealing with just one buyer, answering their questions can fill your working day. If juggling multiple buyers and fielding questions from all of them, be prepared for a lot of tedious work putting documentation together and digging up old paperwork (and records) to answer all kinds of questions many of which will appear extremely silly to you.
Many of the questions your potential buyers raise will need to be answered by your accountant. Of your accountants needs to spend several hours on this work and they’ll expect to charge you for their time. This is not covered under your usual accountancy charges.
But the largest bill is likely to come from the lawyer.
It’s never a good idea to enter into the sale of a business without taking proper legal advice. This advice, together with the time to draft the contract of sale, can cost many, many thousands of pounds. To give you an indication, on a recent £2m sale, a vendor spent in excess of £20,000 for the drafting of the Heads of Terms, the Sale & Purchase Agreement, the Shareholders Agreement, and the Personal Guarantee (to cover the deferred payments). For another sale, a simpler one at £500K, the total legal fees came in at over £8,000.
The lowest price I’ve seen for a really, really small deal was £1,200.
Buyers Don’t Care for Your Valuation
No matter who valued your business, buyers don’t give a damn. They will come to their own conclusions about value and their value will likely be a lot different to valuations you’ve had from business brokers and the like.
It is difficult to over-emphasize how different buyers’ valuations can be.
Two recent examples I have from people who contacted me for advice recently:
A lady who owns a care business got three valuations from different brokers and the valuations ranged between £500K and £700K. After one year of her business being on the market she had received 20 enquiries and only two offers for her business. Both offers were for less than £50,000.
That £50,000 figure is not a typo, I didn’t mean to say £500,000.
A couple running a car spraying business had two valuations from well known brokers both of whom gave them a valuation of between £400K and £500K. After nine months on the market they had received only one offer, it was for £20K (with just £10K up front and the balance in installments).
It is not always the case that buyer valuations are so far out, but their is usually a big difference in opinion between what the seller wants and what the buyer is willing to pay. It is called the valuation gap, and it takes skill and savvy to close that gap.
If you want to get the highest price for your business it takes a lot more effort than the average business broker puts in! In fact, for most small businesses, using a business broker is not the best option anyway.