ABLE to Sell Your Business

How your business will be valued by buyers.

My start in business brokerage met with some frustration early on. I was following the plan, using the resources, and not selling businesses. When I would meet with a new prospect who was interested in selling, I would look up the “rules-of-thumb” and tell the seller what I thought his business was worth. He would agree to work with me. And, then, we would proceed to not sell his business.

Why didn’t the business sell? Ultimately, it was over-priced. How did that happen? I was using what was, arguably, the most trusted resource for estimating the value of businesses. The short answer is this: rules of thumb can be poor tools for valuing businesses, especially if the business varies in any way from the rule.

With the “rules” failing and my frustration growing, ABLE to Sell Your Business was born, a systematic process for understanding how businesses would be valued by buyers. Before completing the sale of your business, you must have a buyer that has determined the business is DesirABLE, TransferABLE, and BelievABLE.

DesirABLE

The first requirement for selling your business is a buyer. To have a buyer, your business must be desirable. One of the first questions I ask owners interested in selling is “How much are you working each week?” It isn’t uncommon for them to indicate they’re working 60-80 hours per week. In the eyes of the buyer, this is less likely to be thought of as a business and more likely to be considered a very expensive job. That isn’t very desirable. Attached to the acquisition of your business is the associated quality of life. As you can imagine, there aren’t a lot of buyers interested in spending their money to work 60-80 hours each week.

How does your current business model match up with the operational intentions of potential buyers?

TransferABLE

Once you’ve found a buyer who’s considering the purchase of your business, a presentation will be made of what the buyer gets when he purchases your business. And, buyers only want to pay for they’re going to receive. If you had a truck that wasn’t included in the sale, the buyer wouldn’t want to pay for it. The same can be said for goodwill.

Goodwill can be quantified by the ongoing, financial performance of the business and in its pre-sale state includes goodwill to the owner. How much goodwill remains when the owner leaves? This is the goodwill or continued financial performance that transfers to the buyer.
Buyers do not want to pay for what they won’t receive. How well will your business perform when you’re not there?

BelievABLE

Lastly, now that the buyer has decided your business is desirable and transferable, is everything we presented to the buyer believable? Every leap of faith on the part of the buyer comes out of the price. Were the assets priced with inflated values? Do the financial statements and corresponding tax returns support each other? Or, do explanations need to be made to help the buyer “understand?”

Prior to completing the transaction, the business will enter due diligence; the process for verifying the performance, operations, and assets (and liabilities) of the business conform to the assumptions made by the buyer when making an offer to purchase. If the buyers’ assumptions were wrong or based on information that cannot be supported or verified, the business just failed the believable test.

Surprises are bad. The buyer only has three ways to respond to conflicts found during due diligence: he can lower his offer, change the terms, or just walk away.

CASE IN POINT

Several years ago, we were representing to very similar businesses for sale with similar earnings as well. Each business had annual earnings of about $250,000. They did differ operationally. Business A was owner-operated. The owner worked 60-80 hours/week. Business B’s owner lived out-of-state and came in town twice each month. Can you guess which business sold for more money? Obviously, Business B sold for more money. There’s another question, however, that’s even more important: Which business never sold?
Other than never, when would you like to find out your business may sell for less than anticipated? CBankston provides a systematic process for understanding how your business will be valued by buyers, identifying potential buyers, preparing for due diligence and underwriting, and completing the transaction.