It’s not enough to get your financial information together and to contact your landlord for a commitment when selling a business. While doing these right things, owners often make three fatal errors that significantly reduce their chances of achieving a successful sale. Those problems are:
1. Signing an open listing might make a person who is selling a business feel that he or she has the upper hand, having engaged more than one broker to sell the company, and retaining the right to do it yourself and avoiding a commission expense altogether. That’s the way this kind of listing works. The broker gets paid only if introducing to the business, the person who buys it. And the seller is free to sell to any other buyers without obligation to the broker. But there are problems with this approach. The "listing" agreement which imposes little responsibility or accountability on either party, is not likely to motivate any brokers to work hard, and can easily lead to a dispute later on. One seller, for example, found that the person to whom he sold a food market had been introduced to it by two different brokers, whom the seller had engaged with open listings. This came out in a civil suit in which the brokers successfully sued the seller for interfering with their business relationships and violating the terms of the listing agreements by instructing the escrow holder not to pay their commission claims.
Open listings rarely result in a satisfactory outcome either for the person who's engaged in selling a business, or for the broker.
2. To set an asking price that's too high in relation to documented income and then claim the price is right because actual income is higher than reported, is a strategy favored by some sellers, but a strategy likely to bring trouble, rather than achieving the desired result. The least of the problems incurred by someone wanting to sell a business with this pricing technique, is that buyers will be "turned off" to the seller. The obvious question is: "If the seller is trying to cheat the taxing authorities, how will she try to cheat me?" That illustrates the skepticism any buyer would have about the honesty of the seller and, by extension, the actual value and desirability of the business.
Merely losing a buyer is the best-case scenario. It also is possible that word will leak out to the IRS and other taxing agencies that the seller is failing to report all income. That could bring the seller serious civil and legal penalties. Besides, any individual naive enough to accept that story and proceed with the purchase, is unlikely to have the skills and experience needed to achieve success with the business. Then, when the buyer figures out he was "tricked" into paying the price, the trouble will spread to the seller, now a prime candidate to be sued for misrepresentation.
3. Some sellers think it’s smart to play "hard to get." According to this reasoning, if the buyer cannot easily reach the owner of the business to ask questions or negotiate a transaction, the buyer will form the impression that the seller must be very busy with other prospects and offers. So the prospective purchaser believes that he (or she) had better hurry up and put in an offer--an offer that the seller will like.
The fallacy with this maneuver is that it doesn't usually work. Most buyers, with plenty of business opportunities to consider, will simply lose interest in any offering that comes with added and unnecessary obstacles.
Since finding a good and qualified buyer to pay a fair price for a small or mid-sized business can be hard enough, it's bad strategy for someone interested in selling a business to make matters worse by committing one of these serious mistakes.
About the Author: Peter Siegel, MBA is the Founder of www.BizBen.com (established 1994 - 7000+ California businesses for sale, 200 new listings daily) and the Director of the BizBen Network (16,000 business buyers, 4,000 small business owners, 1,800 California business brokers & agents). He consults daily with business buyers, business owners, small business advisors, business brokers and agents on selling and buying California small businesses. He is also the author of three books on the topic of how to buy and sell California small to mid-sized companies. For a FREE consultation on the best way to buy or sell a California business, phone Peter Siegel direct at 925-785-3118.
Categories: BizBen Blog Contributor, Deal And Escrow Issues, How To Sell A Business, Selling A Business
Comments Regarding This Blog Post
I agree with all these points, and I think that one of the major mistakes sellers make when selling their business, is simply not taking the advice of their broker. It's important that the relationship between broker and seller is open and trusting. Many sellers, understandably, may have been burned by brokers who were unprofessional, but if the relationship is bad, especially with a competent broker, then it makes the selling process all the more difficult. A seller should understand that it will take time to sell the business, sometimes, six months to a year, and so if they give the broker a three-four month listing, then they are not do him/her justice. The broker who does not have enough time to get the listing sold with an obligation from the seller, may put more of their efforts into listings that have a longer term on the listing contract.