It was an interesting way to start an interview.
Why does everyone selling a small business go nutso?
I wish I could have challenged the assumption of the question, but I couldn't. As anyone who has tried to buy a business knows, a high percentage of business owners go whack-a-doodle when they try to sell their small business.
- They make crazy assumptions about the value of their business.
- They become irrational about basic, reasonable expectations from prospective buyers.
- They ignore, second-guess and sabotage advisors.
- They just become generally silly.
The interviewer asked the question on behalf of a group of small business buyers he represented. These individuals were each actively trying to buy a small business. They spent their days talking to brokers who had businesses listed for sale, and speaking with owners who might be interested in selling. And these buyers were constantly sharing one conclusion: all sellers are nuts.
So, the interviewer asked me: Why are small business seller’s so crazy?
"Our language is lazy. Small business sellers are fantastic, but they are extremely rare. Your buyers have been dealing with small business owners who are trying to sell, not with real sellers. "
Just word play? I don’t think so. Seller's engage. Owners go nuts -- I know I did.
Why We Go Nuts
Selling a small business is scary. There are a lot of risks, and a lot of unknowns as you make your way through the process for the first time. It’s an emotionally taxing, often frustrating journey – and it’s terrifying.
I still remember how afraid I was. There I was dealing with numbers bigger than any I’d ever dealt with before, and with consequences that ranged from losing everything, to all my dreams coming true. I spent 8 hours a day running my business as if I’d own it forever, and then worked another 8 hours doing what I needed to do to help close the sale.
It was crazy making, and I didn’t handle it well. I wasn’t a "seller". I was just a normal, "freak" owner trying to sell my business. What about you?
Are You a “Seller” or Just an Owner Trying to Sell?
If you walk into a business broker tomorrow and sign an agreement to sell your small business, you become the “seller”. In the agreements, documents, and marketing material you are the seller. That’s what they'll call you. Seller. You own the business, you’ve listed it for sale, so you must be the seller.
The ironic thing is that even though you’ve listed your business for sale you will probably never “sell” anything. Online statistics suggest that only 20% of businesses listed for sale will ever sell. But they will still call you the seller after you list the business. Maybe they should start by calling you the “lister”?
Broker labels aside, do you know what it takes to be a real "seller"?
Because to be Called a “Seller” You Should Understand: the Process, the Product and the Fair Price.
What does it look like to sell a small business?
What a “seller” does:
A seller will have some sense for what is to come. I’m not saying a seller needs to be an expert on selling a business, but a basic understanding of what the process looks like should be a prerequisite for the title of seller.
What are the likely interruptions, disruptions, and delays that are a natural part of the sales process?
What is due diligence?
When does it occur?
A seller should have reasonable expectations of the roles of the parties involved in a potential sale.
A seller will understand most of what’s coming before it comes. A good business broker will turn an owner into a seller long before they start dealing with buyers. A bad business broker will wait until the process teaches the owner about selling – even as they watch potential deals disintegrate.
What an owner trying to sell does:
An owner trips through the process from beginning to end, being surprised 100 times as they try to sell their business.
They will experience fear like we all do, but an owner will stay stuck inside of their own head. They will hide from the process and the previews that the professionals they engage try to share. They will be confused by the basics of the process, but they will assume they understand the process even though they’ve done little or no work to learn it. “How hard can it be, I’ve sold other things before?”
They will believe their own opinions of “how this should work” will win over outside restrictions and regulations related to the sale of a business.
Owners won’t understand, or make an effort to understand, the process. Seller’s will.
What are you selling? How does the marketplace view your type of business?
What a "seller" does:
A seller figures out how to see their business with some emotional distance. They will ask and try to understand how the market views their business.
This is my business. It is like other businesses, but it also unique. As a seller, I understand this. I understand that my business is “special”, but “special” doesn’t always mean good. My business has value, but my business also has warts. Problems. Areas that negatively impact its value to a potential buyer. Even though I’ve put my heart and soul into this business over the years, I recognize that I’ve done so imperfectly.
A seller will recognize the reality of their business. How it makes money. Where the opportunities are. Where the weaknesses are. A seller doesn’t need to call attention to those weaknesses, but they know they exist. They aren’t shocked or insulted when a buyer points them out.
What an owner trying to sell does:
How dare you call my baby ugly! My business is a unique, beautiful reflection of me. It is precious, born of the labor I’ve put into it over the years. That’s what defines it, and it is what defines me.
An owner views their business as an extension of themselves. They don’t see the business as a machine for producing results for the new owners. Instead the business is the owner's identity. So, when the buyer dares to criticize or even fairly evaluate the business, the owner takes it as a personal insult.
All businesses are imperfect. An owner will view those imperfections with pain and personal embarrassment, if they allow themselves to see the imperfections at all.
A seller will see those imperfections for what they are – part of the reality of any small business.
The Fair Price.
What’s my business worth? What’s a fair price for the business?
What a "seller" does:
A seller understands how the market defines “fair price” for their business.
Don’t misunderstand, knowing fair price doesn’t mean a seller has to list at fair price. A “seller” can ask $200,000 for a business with a market value of $60,000. But to be a “seller” you should understand why someone might think $60,000 is the fair price, and have a reasonable reason why you are asking more. At the very least, a seller will realize what "fair price" might be based on.
For example, most small businesses are valued based on a multiple of Seller’s Discretionary Earnings.
So, to dangerously oversimplify the valuation process let’s just say:
- If your SDE is $80,000, your business is worth $200,000 on average.
- If your SDE is $50,000, your business worth $125,000 on average.
Sellers who understand “fair price” can disagree on what they will accept as a price for their business, but they will argue value based on reasonable opinions. They would understand why a buyer might approach their business and assume a value of 2.5 x SDE. A seller might respond:
The $125,000 price is based on an average multiple of earnings . . . .but we’ve grown dramatically in the last two years and that growth has had a lot of one-time costs associated with it, and that's why we're asking $175,000.
What an owner trying to sell does:
For an owner, fair value, means it’s a value that is “fair to me”. An owner's fair value equation often includes variables unrelated to the business or market.
The retirement home we want to buy in Florida costs $350,000, so I need to get that much from the business.
My financial planner says I need at least one million to retire.
The interesting thing is that these same owners would never consider approaching price this way with the service or product that they sell in their business.
Listen, normally we price this at $200, but my husband wants a new fishing boat, so we’re asking $675.
But they do it all the time with the sale of their business.
Think about it. You check the online value of your car before you sell it or trade it in right? You don’t assume your car is worth twice the market average simply because you’ve owned it for 20-years. Do you assume the car is worth more than similar models because you want to drive the next car you own cross-country?
If you want to be a seller, you need to understand how the market prices a business like yours. You don’t have to agree with it, or list the business for sale at that price, but a seller should be informed about what the market would characterize the fair value of the business.
Buying a business is a challenge, but it can be nearly impossible if you are dealing with “an owner trying to sell” instead of a seller. If you’re serious about selling your business someday, consider what it means to really be a seller, and make sure you understand . . .
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