Readers of my blog and articles on BizBen have seen my advice for busines owner/sellers about putting your business on the market, lining up a suitable buyer, negotiating a win-win deal, and then completing escrow with minimum problems.
Recognizing that 70% of small California businesses offered to buyers are never sold, and that some of the obvious reasons: over-pricing, inadequate records, insufficient lease--have been discussed in detail, it might be useful to point out lesser- known problems, often resulting from errors made unknowingly when attempting to sell a California small to mid-sized business.
The Common Six Owner/Seller Mistakes Are:
1. Don't assume you always can tell whether a prospect might be a buyer. Okay, you usually will be right in your opinion, when someone is looking at your business, about whether the person is "for real." But you can be wrong sometimes, and that mistake can result in neglecting to work with someone who may have been the perfect buyer. Every experienced business broker can tell you stories about losing sales by guessing wrong about who is, and who is not a likely buyer.
2. Don't make the business look too "sanitized." Seems like a strange idea, because you would think the cleaner the premises, the more appealing the business. Certainly a company that shows poorly because it looks to be in disarray will turn off prospective buyers. But so will the appearance that the owner is spending more time with housekeeping chores than with conducting business. Buyers become suspicious when a tire shop looks like it is ready for use by a heart surgeon.
3. Don't neglect to engage with your prospects. Some sellers communicate a cynical attitude, probably because they have wasted time with people who aren't qualified or interested in buying the business. But buyers usually are uncomfortable around someone who doesn't make them feel welcome. A powerful strategy of most successful sales people is to establish rapport with customers. Whether or not they are conscious of it, people want to buy from someone they like. By making an effort to be friendly, you increase the chances that prospects will want to do business with you.
4. Too friendly, though, is also a mistake. The prospect may say "yes" to your lunch invitation, but that won't make him more likely to buy your business. And it may provoke suspicious thoughts that you are being too accommodating. The level of warmth you show toward buyer prospects, the "chemistry" you establish, is an expression of your personality. You don't have to be a phony, just be careful not to get too cold and distant or too "warm and fuzzy."
5. Don't forget to become informed about the marketplace and how it will impact the appeal of your offering. Do you have some rationalization for the price? Have you investigated financing options to help a motivated buyer get the money needed to complete the purchase?
6. Don't put off necessary preparation until you have an interested buyer. By then it's too late to start collecting financial information, compiling an assets list, and negotiating with the landlord for a new lease. While you're finding out that getting prepared takes longer than you'd thought, your "buyer" will be negotiating to buy another business opportunity, one that is all ready to be investigated and purchased.
By avoiding these seller errors you'll increase your chances of joining the 30% of California small business owners who achieve a satisfactory sale of their business.
If you have additional feedback and ideas regarding seller mistakes please feel free to comment below this blog post/article - let's keep this discussion/topic alive with comments and replies - I look forward to hearing about your experiences, and issues that could prohibit the sale of a business.
About The Author - Peter Siegel, MBA is the Founder and Administrator at BizBen.com. (an online portal for California Businesses For Sale & Businesses Wanted To Buy). He is a nationally recognized author (3 paperback books and 4 eBooks on the topic of buying an selling, financing the purchase of busnesses) and a daily advisor to buyers, sellers, agents, and brokers. If you are either thinking of selling a business or actually in the process of selling a California small to mid-sized business and need professional assistance utilizing high performance strategies (ProSell Program), and highly effective marketing ideas (or need resources or contacts to assist in your sale), or seek search/buy strategies to buy a California business, phone Peter direct at 866-270-6278 (if you get voicemail leave a detailed message and he will phone you back promptly).
Categories: BizBen Blog Contributor, Business Broker Information, How To Sell A Business, Selling A Business
Comments Regarding This Blog Post
One mistake I have seen from sellers, as well, has been that they have been too secretive. A seller who is distrusting of buyers, especially during the due diligence period can end up killing deals. A buyer in this market wants to have as much information as possible, so that they can make an educated decision to buy the business, and they may feel uncomfortable if a seller does not want to show tax returns, or release them through a third party, or show sales tax returns, etc. A seller, in this market, must make as much information available for the buyer.
What a valuable collection of comments! If owners paid attention to all this advice they'd have much more success in selling their businesses.
While much has been covered, I can add a few points:
1. Don't fail to compile a complete list of every asset that will be conveyed to the buyer along with the cost to replace each item with similar kind, condition, and age. (Consider how much you would need from your insurance company to replace everything if it all burned to the ground.) This value of the "FF&E" (furniture, fixtures, and equipment) can be the "icing on the cake" when it comes to a potential buyer making a reasonable offer and the seller receiving a favorable price.
2. Don't let the lease derail your deal. Talk with your commercial real estate attorney and your business broker about the best way to assure the continuity in the location that most buyers of most businesses will find crucial to the company's value.
3. Don't fail to plan ahead. Engaging in a 12-month Value Builder System program before placing the business on the market can increase the ultimate value of the business by as much as 70%.
4. Don't alienate the staff. In most businesses the employees are the lifeblood--and any purchaser will want the security and stability of their continued employment.
Contributor: Business Broker, Northern California
Some additional observations to make.
1. Is it crystal clear what you are selling and is it written down? It seems some sellers want to sell their business but not sure what it includes and why. If an item is part of the business that generates its cash flow the buyer will want it.
2. Selling a business is a much longer and more complex process than most sellers are aware because they probably have not done it before. Have a team of professionals lined up to give detached unbiased but trusted advice. Make sure they are qualified and have done business transactions before. Getting advice from an attorney that specializes in divorce or bankruptcy is not the right person you need.
3. Has the financial performance of the business been "normalized". If the seller is a husband and wife that both work in the business and they both plan to leave the business when it sells then the buyer needs to find a replacement employee at a rate the market pays for that position. Similarly, if the owner owns the real estate and its not part of the sale, then the value of rent needs to part of the financial presentation at market rates or the rate the seller wants the lease to be paid.
4. All business sellers bring a skill set that makes their business successful. Write a very brief job description of what the seller does so the buyer can decide if this is the role they wish to play or hire or delegate parts to others as its not part of their skill set. A new business owner will rarely rub it the same way as the old business owner.
5. Technology is now touching all businesses and its forcing many older business owners to adjust. Before putting your business on the market, understand the latest technology so you can explain what does and doesn't work in your business as an astute buyer will already know.
1. Gain an understanding of your businesses wort. Be realistic in your view. Try to visualize what others are seeing rather than you own perspective. This will help you negotiate from a position of strength.
2. Make a list of any items that might be important to improve prior to the sale. Be sure to document the improvements you make and if these improvements have a net gain track it so you can explain any unusual fluctuation to a prospective buyer.
3. Take an inventory of the assets and estimate the value of each category. If there is anything that is not working, that you do not intend on fixing make a list and disclose these items up front. Likewise, if there is anything that you do not plan on including.
4. Understand that selling a business is nothing like selling a home or anything else. Attitudes can flare up easily and buyers are very suspicious. The best approach is to give them 2 thing immediately, a) a brief description that clearly identifies the opportunity. b) The assurance that once you are convinced they are qualified and sincere that you will be completely open and honest with them.
5. Realize that most buyers are looking for something they can build on. Do not be so concerned of the flaws in your model. All businesses have them. These are often the upsides; the opportunity to make their own mark and benefit from the rewards of their efforts. You might read item 1 at this point.
Contributor: Business Broker, SF Bay Area
Here are my six items that I would like my Sellers to pay attention to:
1. Complete disclosure: Being totally honest with the broker about the problems and issues in the business as well as compelling reason why you must sell make a big difference. As a Broker I have been able to overcome disclosure problems if known early by pricing it appropriately and getting Buyers to buy in. Also if you have a compelling reason to sell by a certain date, disclosing that to the Broker, helps make a deal happen, even if we have to accommodate on price or terms.
2. Realistic and Justifiable Price: If the business is priced too high, you turn off a lot of buyers from even making an inquiry. Also those that do inquire tend to then make low ball offers. In my experience pricing the business right has yielded sale price within 90%-100% of the asking price.
3. Operating the business as usual: It would be best if you continue to give raises to employees as usual, continue to pay all your bills, e.g. landlord, and vendors. I have seen owners think it is going to be sold in a few months and then get behind on payments to landlord and some vendors. Then when the Buyer wishes to negotiate with the Landlord or get terms from the Vendors, we run into problems.
4. Interacting with Prospects: Be truthful and give complete answers to their questions, but you are not their buddy. So don't start socializing, handling over your business card with your cell number, etc. Let the Broker handle all communications. This way a deal can be negotiated well without the Buyer trying to take undue advantage. I have had situations where Buyer got Seller to make some commitments behind my back and then it was hard to undo them.
5, Compliance with all legal requirements: Similar to 3 above, don't let any licenses expire and make sure you are paying all your taxes etc.
6. It isn't done until Escrow Closes: Even when we have an accepted offer, you have to keep running the business as usual. Slacking off during that period could make the business look worse at the time of close of escrow. So during pre-close inspection Buyer may want some accommodation because the business is not doing as well as what they saw at Due Diligence.