How do I sell my small business?
Should I list my business for sale online?
Business for Sale listings used to be posted by business brokers and business owners in print media. However, listing businesses for sale in print is rapidly declining for several reasons.
To start with space is limited and only a brief summary of business can be listed. If the user wants more information there is no mechanism for him to get it besides calling the business buyer. The print format is just not well suited for business for sale listings, which tends to be more complex and has several attributes attached to it. On BuySellBusinesses.com business sellers can list up 20 images, several videos and any number of documents. Additionally, business sellers can use deal-rooms, which allows business sellers to securely share documents with selected users only.
Print media tends to be expensive, slow with limited reach, so business brokers and business owners have to advertise in a publication for several months to get any attention. In that duration, changing the advertisement can be onerous and time consuming and because there is a physical media involved – expensive.
Online listings are confidential. Business for Sale listing on BuySellBusinesses.com can be set-up with varying levels of disclosure depending on the sellers requirement. The business seller cab decide what to include or exclude from the listing.
Finally, the most important reason print media does not work for business listings is because print readership is declining rapidly and readership not targeted. In the US, only 6% of time is spent on print media. Radio and TV, as an advertising medium, is just not suitable for business for sale listings.
On the flip side, Internet and mobile account for 36% of time spent on Media. The Internet is the first place business buyer’s start the buying process and potential business buyers spend time researching and looking for businesses to buy on multiple sites. On an average, buyers can take between one to two years to complete the buying process and a large portion of the search is conducted online.
Internet traffic on https://www.buysellbusinesses.com/ is highly targeted because Google and Bing match keywords to Websites so that only relevant users are directed to the site. Dynamic nature of the Web allows business sellers to login to a site and de-list their business listing or change the content of their business listing at any time. Additionally, online sites allow business sellers to track and manage leads generated. When a potential business buyer asks for MORE information, the business seller receives the request and the lead instantly.
The ability to syndicate deals online and share business listings on social media is adding fire to the fuel for online business deals. Business deals can be syndicated through a trusted network, through email or through other business-for-sale sites.
Finally, the best part of listing online is the price. Online listings are cheaper than print media and https://www.buysellbusinesses.com/ and makes business listings even more inexpensive. Being mindful of these facts one can safely assume almost 100% business for sale listings will move online in the next few years.
What are the reason for Selling a Business?
In addition to understanding the business buyer persona, It is also important to understand a business owners motivation to sell a business. Business owners put in a of time, sweat and equity into building a business. Therefore, selling a business is could be an emotional experience for the seller. Businesses are sold for several reasons and similar to understanding the buyer persona, understanding the reason behind the sale can go a long way with negotiations and structuring the business deal. Regardless of determining the business buyer type and reason to sell, business valuation is the most important element for setting the price. Business valuation is pivotal and both the business buyer and business seller must get the business values, preferably using an independent business valuation professional. Additionally, both parties must use multiple valuation techniques to determine the intrinsic value of a business. Now that we have emphasized the importance of business valuation, the following are the most important reasons businesses are sold: Retirement.
Many business owners are in the demographic that will soon be retiring. As per US and Canadian statistics agencies, more than 20% of the population will be over 65 by 2026. For Baby Boomers (people born between 1946 and 1964) business owners, selling their business is the most popular exit strategy to retire. As a business owner, there may be a glut of businesses coming to the market, which is good news for business buyers but may reduce valuation for business sellers.
Business owner fatigue and burnout is the most common reason a business is sold. Additionally, business owners who have owned and operated their business for several years are also bored by the businesses operations. Restaurants, Coffee shops are examples of businesses that may be profitable with potential for growth but the business owner may be selling because of boredom.
Personal and Family Problems
Major changes in a business owner’s personal or family life can be an important reason to sell a business. For example, the business owners spouse or kids may be relocating. Divorce may be another reason to seek a business exit.
Majority of a business owners wealth is tied up in one company. A business owner may sell a part or all of his company to diversify. A balanced portfolio is a critical risk mitigation strategy.
The business owner may have found other businesses to pursue that have higher growth rates or profitability.
The old adage “Everything is for sale at the right price” applies to businesses as well. A strategic buyer may be willing to pay a premium for a business to gain from synergies, eliminating competition, gaining market share or several other reasons. For the business owner it is an opportunity to capitalize their hard work for a premium.
The business may be struggling because of competitive threats. In many cases a business has been around for several years and has not innovated. In many cases business owners may exit the business, which creates a good opportunity for business buyers if they can turn the business around.
Business valuation is the most important criteria to determine the transaction price. Assuming costs are constant, valuation is directly proportional to revenue, earnings and cash flow – depending on the valuation technique used. When the economy is strong, businesses have the highest valuation and it is a good time to exit. The best time to sell a business is when a business has been up for three years and the best time buy a business is in the third year of an economic downturn.
Lack of vision
Perhaps the worst reason to sell a business if lack or vision. In many cases business owners go instant gratification and losing out on long-term growth from the business.
Determine Business Buyer Persona
Do develop a negotiating strategy the business seller needs to understand the buyer of the business (Seller Due-Diligence). There are several types of business buyer personas where the buyer can be an individual or a business.
Financial Buyers – Financial buyers look for value, spruce up the business and then sell it. Financial buyers are looking for profitability or signs of profitability and stability that are right around the corner. Sometimes they are looking to merge a business with another to benefit from synergies (Synergistic Buyer) with another similar operation in the industry. Financial buyers analyze the businesses numbers in great detail and calculate the price using valuation metrics and comparable deals. They are most driven by proven return on investment (ROI) and tend to get large amounts of financing to purchase a company. In summary the objective of a financial buyer is to negotiate a deal where the deal can be paid of through operating profits, growth over time or immediate profits from some arbitrage.
PE groups raise capital raised through high net worth individuals, family trusts, pensions and others and are the most common type of financial buyers. Their objective is to maximize value for their investor pool.
Strategic buyers – Strategic Buyers look for buy and hold opportunities where they can enter new markets, increase the market share or foreclose some element of competition. Typically these buyers come from the industry (Industry Buyer) and understand the business and its marketplace. A strategic buyer may be a big company already operating in the industry and wants to acquire a business as a platform to enter a new market or to add new products and services to the marketing mix. Sometimes the purchase can be about getting people or management. Strategic buyers may pay more because they understand the value of the acquisition is more than the financial value of the business. The acquired business provides a new leverage. Strategic deals get done quicker and are usually preferred. Strategic business deals tend to be of larger sizes.
Special-Purpose buyers – There are many types of special-purpose buyers. They may be business buyers are private citizens doing private deals. The buyer may be a public company attempting to defend decreasing market share or defend market share from a competitor. In some cases these deals are emotional and the buyer just cannot stand by and watch a business being sold to someone else. For an emotional buyer, price is not the most critical factor in the sale.
In addition to the above classification, an individual buyer can be classified as:
Lifestyle Business – An individual buys a business that revolves around his / her hobbies, personal interest or social life. Sea sports, nigh-clubs, fashion shops, dancing schools are examples of life style businesses.
Owner / Manager – The business buyer wants to make a living and a profit from the business by operating the business.
Owner / Manager as required – The buyer is capable of running the business but does not want to manage the business personally on a day to day basis. Typically absentee owner businesses are non-cash businesses. Cash businesses like cafeterias and bars are very difficult to control without the owner.
Passive Investor – High net worth investors invest in businesses in the same way as they would have listed in shares, bonds and property. They usually hire professional management to run the business.
The business seller must identify the persona (or archetype) of the potential business buyer. Business buyers for main street businesses ($0 – $ 2MM) tend to be individuals who have experience in the sector or companies acquiring businesses for growth. Small main-street businesses with valuation of less than 500K are almost always individuals. First time buyers tend to buy smaller businesses that typically have a valuation of less than 500K.
Business buyers in the lower middle market ($2MM – $5MM) are dominated by strategic corporate buyers and private-equity groups. Private equity groups buy twice as many businesses as compared to strategic corporate buyers, so lower middle market businesses must target private equity groups. In the same vein, the best time to sell a lower middle market business is when private groups have raised a lot of money. As such, it helps to keep a watch on business cycles for private equity groups.
What documents are needed to sell a business?
Business brokers and sophisticated business buyers may use intrinsic valuation techniques for business valuation. They will project the free cash flow (FCF) from the business for the next few years and discount the cash flow projections to determine the intrinsic value.
Additionally, business buyers will also try and estimate the value of a business by looking at values of similar businesses sold locally.
Selling a business is complex and the seller must take the time to plan and organize the exit. To assist with valuation and eventual sale, businesses need the following information.
- Balance sheet, income statement and cash flow statement for 3 to 5 years
- Corporate tax returns for 3 to 5 years
- Value of inventory
- List of capital expenses on fixtures and equipment
- Customer and contact lists (Customer of Contact Management System)
- List of employees
- Copies of all leases, franchise agreements (if applicable)