The following guest post is by David Ryan, founder and managing member of Upton Financial Group, an advisory firm specializing in business value strategies and solutions.
Many business owners wait years to sell their businesses until the market is healthy enough to command a good price. We’re in one of those markets now. The International Business Brokers Association (IBBA)’s fourth quarter report for 2013, prepared with the Graziado School of Management at Pepperdine University and M&A Source, found that 87% of respondents expected more deals to close in 2014 than last year. More than half of respondents marketing businesses valued at $1 million or more said it’s a seller’s market.
Unfortunately, owners sometimes miss out on opportunities to maximize their selling price, because they are unfamiliar with how the market works. Here are three strategies to reap greater profits from your sale.
1. Look for buyers in the right places.
A recent survey by the IBBA found that for businesses valued from $500,000 to $1 million, 51% of buyers come from a 50 mile radius of their location. In 32% of these cases, buyers are found within 20 miles. However, as businesses’ valuations rise, other companies or investment firms start getting interested in snapping them up—and these purchasers generally aren’t local. For companies valued at $5 million and up, buyers come from more than 100 miles away in 77% of cases.
What does this mean for you? If you own a business worth $1 million or less, your buyers—besides being local—will likely be first-time business owners, looking to acquire a job. Your marketing materials and sales pitch should address the concerns that corporate refugees may have about maintaining their lifestyle. For instance, these folks will want to see that you can put money into your retirement savings account each year, take regular vacations and enjoy interests outside of the business. If you can’t do these things, put people or systems in place that make them possible. Otherwise, buyers may avoid your business. I once worked with an owner who really hit it off with a potential buyer who shared a lot of the same interests. Then the seller told his prospect he never had time to enjoy any of the hobbies they shared. No sale.
Owners of more substantial-size businesses should be prepared to address the concerns of more sophisticated, financially-driven prospects. The IBBA found that for businesses valued at $5 million or more, 60% of buyers were companies owned at least in part by private equity groups, and 35% were existing companies that wanted to make a strategic acquisition. These folks will be very interested in seeing that your monthly financials are timely (ready by the 20th of each month) and reviewed or audited — and that you have reports that show margins by product or service and by customers.
2. Do some soul-searching. Many owners believe they will sell their business to the first person who offers the right price. But once potential buyers start calling, sellers usually realize that they want more than money. For instance, if you have spent 30 years building a business, you may not be happy to sell it to someone who wants to rebrand it and put his name on the signs. You may want to know that a buyer intends to keep your loyal management team in place after you leave. Perhaps you want to make sure that your daughter or son can continue to work in the business for the next five years.
All of these are legitimate concerns—and can be addressed in your marketing strategy and negotiations. If you are working with a business broker, investment banker or other intermediary, mention them early, so you don’t waste time with the wrong type of buyers.
Before your broker starts approaching any prospects, ask for a list of their names. There’s no point in approaching companies or individuals that you loathe or whom you know come with unwanted baggage, like a bad reputation or poor credit.
3. Get realistic.Many sellers know that being too optimistic about pricing can stall a deal—but make this critical error anyway. It was the top mistake by sellers in 2013, according to IBBA’s survey, cited by 39% of advisors.
It is next to impossible to look at your business with the same eye that a prospective buyer does. Before you try to find a broker to help you market your business, check out searchable databases of businesses currently for sale nationwide to get a sense of current pricing trends. Three that I recommend are BizBuySell, MergerNetwork and MERGERPLACE. Many otherwise savvy business owners don’t take this step, which can lead them to spend time on marketing approaches that don’t work. The more educated you are about your niche in the market, the easier it will be to make a deal.
Forbes 4/24/2014
