10 Reasons Why Selling A Business Is So Different Than Any Other Selling Environment

Privately-held businesses are sold in an environment that is unlike the selling environment of anything else you can imagine!

Sound surprising? After you review the following ten reasons that make selling a business different, perhaps you will agree.

1) Confidentiality

How do you sell a fully-operational, profitable business without anyone knowing it's for sale? Adverse things can and do occur when people know, or think they know, a business is for sale. Confidentiality must be maintained. Here's why.

• Employees get nervous and may leave for more stable employment. They believe that new management will mean new employees. That may be true in public company acquisitions but is generally not true in private company sales. Your staff represents a significant portion of your company's value. Should your key employees leave, most buyers of private companies will not buy.
• Competitors may take advantage by using the information as a way to gain an advantage and pirate customers. After a recent seminar on buying, selling and pricing businesses, a businessman said to me, "I wish you had given this seminar last year. Your information would have saved me $150,000." He had decided to sell and had sent information to his competitors and others within his industry offering his company for sale. Shortly thereafter many customers stopped coming in. Apparently his competition was using the information to undermine customer confidence by saying, "I know you have done business with Joe for years but - he's selling out you know and . . ." Twelve months later business is almost back to normal. Many companies have not survived this mistake.
• Suppliers extend credit to your business because of your good payment record over the years. Now they hear you are "on the block". Might they put you on COD? What impact might that have on your business?
• Bankers have a healthy skepticism of small business. They want your business but they have been burned in the past by others. They know that a very high percentage of small businesses fail. What's that? Who's trying to sell his business? Might the bank decide not to renew your line of credit? Call your note(s)?
• Customers may lose confidence and decide to trade elsewhere. Where are you without your customers?

In summary, sell it but don't let anyone know it's for sale. What else must be sold under that condition?

2) Business Owners Do Not Know What The Business Is Worth

Essentially every business person we have worked for has confided that they really did not know what their business was worth. They admitted that although they didn't know what the business was worth, they knew what they wanted for it."

What seller of any other item being sold doesn't know the item's worth?

3) Buyers Don't Know What They Want To Buy

An overwhelming majority of buyers come to us and profess to be in search of either a light manufacturing opportunity or perhaps a distribution company. This is code for "I really don't know what I want to buy but I'd feel silly telling you that." Later, virtually all admit they really didn't know what they wanted. The odds of a person buying the business that attracted them to our offices are 1 in 500! The odds of buying a company within the industry for which they initially stated a preference, 1 in 50!

What else has to be sold to someone who doesn't know they want to buy it?

4) The Major Selling Point Is Intentionally Concealed 

A business owner's desire to minimize taxes overrides the desire to show bottom line profits. You have to look between the lines in order to determine the real earnings of a private company.

Can you think of any other situation where a seller intentionally conceals a major reason to purchase?

5) Everyone, Yet No One, Knows The Value

Ask ten buyers what a business is worth and you will get at least 10 different answers. One of the ten will offer more than the rest. Why? More on this later. Buyers, as with sellers, don't really know what a business is worth. Unlike virtually every other commodity sold, there is no public record of sale prices for private business. As a result, we have seen a multitude of valuation methods used by buyers, sellers and advisors to estimate a business's value.

What else has to be sold under conditions where nobody knows the real value but everyone has an opinion?

6) Future Value Of The Purchase Is Dependent Upon Who Buys It

You own a business and a home. So do I. We both have profitable businesses and nice homes. Let's swap homes and businesses just for the change and variety. It's now a year later. The value of our homes is basically the same. What about our businesses? Might one of us be in trouble, perhaps both of us? What do I know about your business? What do you know of mine? Think of a business as a vehicle. Will a new operator drive the business to higher peaks, or drive it into the ground?

What else is sold where the future value of the purchase is so dependent upon who buys it?

7) Third Parties Refuse To Ratify The Wisdom Of The Purchase

We can buy virtually anything and a third party will participate in the purchase by providing the financing. This participation essentially ratifies the wisdom of our purchase. An excellent example is the purchase of real estate. The bank appraises the property, ratifies we are not paying too much and gives us a mortgage. Business equipment and inventories are not favorite collateral with bankers. What percentage of the asset value would they lend anyway? Which asset value would they use? Liquidation Value, Book Value, Replacement Value, Value in Place, Net Book Value - and what equity or loan to value percentage would they apply - 60%, 50%, 40%? What part of a business' value is attributable to the value of assets? Usually less than half. How much will your banker lend you on your business' assets today?

What other major purchase can you make where a third party will refuse to participate in the financing to any degree of significance?

8) Conflict Between Personal Desires And Financial Considerations

Financial considerations are important but do not drive the business owner's ultimate decision to sell. Business owners sell their businesses to gain a lifestyle change. The decision is a combination of personal and financial considerations. Nothing a business owner will ever sell will have the personal attachment the business represents. Buying a business is a personal and lifestyle decision also, not purely a financial one. Buyers are seeking independence, freedom to express themselves and their ideas, the ability to take control of their own future. Obviously, the financial aspects of a purchase are important but financial considerations do not drive the ultimate decision to purchase. Nothing will have as great an impact on a buyer's way of life than buying a business. Both buyer and seller have to balance the imagined personal gain against uncertain financial prospects. A business opportunity, not a business guarantee, is involved.

What other purchase or sale can you imagine that involves such a high degree of personal involvement and financial uncertainty?

9) Too Many Customers

Those who sell businesses are inundated with buyers. It seems everyone is either professing to be a buyer or knows one. Buyers are everywhere. Finding the right buyer is another story. It's always been a seller's market for viable businesses.

Can you think of any other business where people complain of too many customers?

10) Extremely Emotional Atmosphere

A business is to its owner as a child is to its parents. Your business is an extension and a reflection of you. It's your baby and you do not have to sell. You have sacrificed yourself, your family life. There have been times when you didn't take anything out, rather you put everything back into the business. All those long hours, your hopes, your dreams. . . now you are thinking of selling? Put the business up for adoption?

What else is bought and sold in such an emotionally charged atmosphere?

In Summary, the environment in which a business must be sold is challenging and unique. Therefore, the methods used to sell a business is also unique and is modeled to meet those challenges. Although the sale of a business is different than the sale of essentially anything else, what occurs is straightforward. For an understanding of the process, assume your business is a public company. Before attempting to attract a suitor your board of directors would first engage an investment banker to identify appropriate acquisition candidates (buyers) and determine the company's worth. The investment bankers would provide the board with information as to the best acquirers and what values or strategic advantage might be achieved through a sale or merger of the firm. The board of directors would then decide if sale or merger of the company was in the best interest of the stockholders. Assuming the decision to sell was ratified, the investment bankers would then package your company so as to be most attractive to the appropriate acquiror(s). Essentially, a similar process is used by business brokers / intermediaries to sell private-held companies, but dealing directly with business owners - not a board of directors - on a more personal basis.

When the decision is made to sell and the sale is properly conducted, your business can be sold for the best price and terms without anyone ever having known it was for sale.

Comments

[monica kermani]

Interesting article, because I'm looking to sell my business. I know I should hire a broker, but I'd like to try to sell it privately first. In any case, do you have any other suggestions or advice? Thanks

[Claire Nortel]

Monica -- I suggest looking into small business groups in your area. They should be able to help you and even direct you to a broker, should you need one.

I also highly recommend BizTrader.com, which is this online global marketplace where you can invest in, buy, and sell a business. It's inexpensive to post your business (often free), and I know brokers use it as well. You can even use it to find a broker. Check it out and good luck!

[Claire Nortel]

Woops. That should be http://www.biztrader.com

[Rose Stabler - Author of the Article]

Monica - I apologize for my delayed response. I suggest reading these additional articles. You can decide which path seems best for you. I wish you luck.

Selling a Business -- The Numbers Game and Finding a Buyer
http://www.certifiedbb.com/blog/2007/06/selling-business-numbers-game-and.html

Why Not Sell The Business On Your Own?
http://www.certifiedbb.com/blog/2007/06/why-not-sell-business-on-your-own.html