Don’t Move too Fast When Selling Your Business For Sale!

What’s The Difference?

In an effort to define the difference between a sophisticated investment banker and a small business broker, I stumbled upon a lesson for those selling their own businesses. In a nutshell, investment bankers take the time to prepare before marketing a business for sale. Most business brokers and some business owners begin marketing the business for sale long before the preparation is complete. The results are disastrous.

Preparing the Business For Sale

This site discusses the value of preparation quite extensively and laments the lack of it for many potential sellers and small business brokers. Preparation includes surfacing every important fact about the business for sale, documenting it and organizing all supporting information. If the preparation is done properly and comprehensively, the seller has made all aspects of his business for sale transparent to potential buyers. This includes how everything in the business for sale works, including marketing, sales, operations, finances, customer service, support, etc. The potential buyer of the business for sale can spend an hour of time and fully understand most aspects of the business for sale and determine their interest level.

I had always wondered why so many of the small businesses for sale we evaluated were so badly prepared, especially those represented by small business brokers. In a recent experiment, the reasons became clear.

The Temptation

I offered to help a small manufacturer sell his business for sale. The company is small, but it has a consistent revenue stream, moderate profitability and a proprietary process that ensures that its niche will remain protected. I met with the owner for 3 or 4 hours and concluded that this was a business that could indeed sell. I provided the owner with a long list of materials that we would need to organize and consolidate in order to prove out the cash flows. As this business for sale was a sole proprietorship, I realized that the tax returns would not provide as much help as they might normally. So instead, I asked him to validate the internal financials with bank statements and corresponding check registers. I also asked for asset listings that matched the tax returns, copies of customer contracts, etc. Although the owner had recently entertained an opportunity to sell this business for sale privately, he needed some time to pull together this paperwork.

As I left his office, I received a call from a motivated buyer. Oddly enough, this buyer was actually located on the same street as the seller and was anxious to acquire another small manufacturing entity. Apparently, his core business was slow and he had excess capacity. I was tempted to say, “Come on down.” I paused and told him that I had not seen the numbers yet. All I had was a verbal statement about the net income of the business for sale, but I had seen no proof. I had spent 4 hours with the owner and had developed a decent understanding of his business model. We had discussed his cash flow and what he felt the business for sale was worth. Nevertheless, although I believed him, I did feel that I needed to see some documentation before I marketed the business for sale to anyone. I told the buyer that I would get back to him when I had something concrete in front of me and had it packaged properly.

Aha!

As I thought back to the several hundred businesses for sale I had reviewed, I realized something important. Every time I had made inquiries into a specific business for sale, the broker and/or the seller had no further information to back up their claims. It occurred to me that for most brokers, getting the business for sale owner to sign a listing agreement triggers the beginning of the marketing process. Upon signature, they immediately slap together a brief description and hit the Internet with it. They assume that the seller of the business for sale will follow up eventually with the necessary documentation. Meanwhile, they will go ahead and aggregate potential buyers, get confidentiality agreements signed, etc.

So what happens when they stumble on a truly motivated, serious buyer for this business for sale? The buyer has a brief discussion with the broker. He reviews, modifies and returns the confidentiality agreement, perhaps within the hour. Then he waits for the package, detailing the business for sale. Many times, the package comes, but has no supporting documentation accompanies it. More often, there is no package at all. The buyer is encouraged to “tour” the facility, while the information is pulled together. Time drags on and the information comes in pieces or not at all. The potential buyer becomes frustrated or loses interest and moves on. The seller of the business for sale becomes discouraged with the process. Both buyer and seller become jaded after repeating this process several times.

Most serious buyers are on the lookout for a particular business for sale. The initial exposure of the business for sale to the marketplace is the most critical. If a lack of preparation creates disinterest among the first wave of buyers to investigate the opportunity, then the opportunity to sell the business quickly, for the right price, is lost. Review the article entitled Selling Your Business for additional details on what specific information you will need to pull together for potential buyers.

The Lesson

In short, do not market the business for sale until you are fully prepared and have made every important aspect of the business for sale transparent as possible to your potential buyers. In this way, you can immediately act on the buyer’s interest and quickly determine if there is a match for this business for sale. Don’t go to market with a general thought of selling the business for sale, backed by little or no documentation. Commit to selling your business and take the time to organize and document all the relevant facts, issues and materials necessary to inform potential buyers of the business for sale quickly. In the end, all parties involved will save time and the price the seller garners for the business for sale may very well be higher.