What Do You Need To Do To Sell Your Business?

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Will Your Business Sell?
If you do a Google search for “what percentage of businesses for sale are actually sold” you will find some disappointing numbers. One view is 30-40%, but that includes larger businesses.
What about small businesses, often called Main Street businesses? Most answers suggest 20% of small businesses for sale will actually sell. Let me help you produce better results.
Of course from my view seller financing and the potential to sell all or part of the business note are key parts of the solution. Many other sources you can find will offer little about this.
At some point in time you may sell your business, provide seller financing and later sell the note. You might not be planning to do any of those. You might only do the first. You might do each of them. I believe that you will find early preparation instrumental to your success.
Why Should You Be Concerned?
What works for a small business owner to operate a business for years, is too often less than ideal preparation to sell the business.
Based on the data available and expert opinions, when it comes time to sell, the small business owner is not well prepared, and lacks proper input to know better.
The statistics alone about the difficulty of selling small businesses seem to illustrate that what I’m stating here is so. This happens because the matter is not effectively dealt with until late in the game.
Once the degree of difficulty becomes clear, the answer all too often is closing the business, not selling it.
Chances are many readers will disagree with my findings at this point. Part of the reason is that many small business owners have not had the actual experience of attempting to sell their business.
Eventually the business owner tries to sell the business on their own. The tendency is to begin by overvaluing their business, so it doesn’t sell.
The next step might be using a realtor to sell the business. By comparison to the process used by business brokers, realtors typically lack the experience to effectively sell a business.
Other Reasons To Be Concerned
The Exit Planning Institute provides the certification program for Certified Exit Planning Advisors (CEPA). They also publish the Natioanal State Of Owner Readiness Report. The link takes you to the 10th annual edition they published in 2023.
To add some credibility to this report here is the view from Kiplinger Personal Finance as of December 11, 2021:
"According to the Exit Planning Institute, up to 80% of businesses will never sell. That means that for every 10 business owners reading this, only two of them will be able to sell their business. Perhaps the most concerning part of that statistic is the fact that 80% of the average business owner’s net worth is tied up in their business. Therefore, when it comes time to retire, eight out of 10 business owners are going to find themselves losing 80% of their worth."
If you are not properly prepared but don’t find that out until you try to sell, it may take a few years to turn things around. For example, here are some reasons that your business may be unsellable:
- The founder (you) is indispensable.
- Low profits
- High capital intensity
- Undeveloped systems and processes
- Lack of middle management
- Unorganized financials
- Vulnerable business model
You can find more details at 7 Reasons Why You Won't Be Able to Sell Your Business. (Inc.com, June 11, 2024)
Family Business Survival Rates
70%
88%
97%
Source: Various studies on family-owned businesses
Small Business Statistics
Here is some statitical input to add clarity to this topic.
Based on the 2023 Small Business Profile provided by the Small Business Administration (SBA) Office of Advocacy, there are 33.3 million small businesses making up 99.9% of all U.S. businesses. They have 61.6 million employees which compose 45.9% of U.S. businesses. SBA defines a small business as a firm with fewer than 500 employees.
If you check some of these statistics on your own, don’t be surprised to find some discrepancies.
For example a reputable source also indicates that 99.9% of businesses are small businesses, but states that they have fewer than 250 employees. But this reputable source is not the actual source of the definition. That is The SBA as shown above.
Depending on who is discussing this topic, you may find other views such as a small business has up to 100 employees. However, for many professionals such as attorneys, accountants, or insurance brokers, a business with 100 employees is a large client.
This was a common issue that I found others complaining about. If you as a business owner are making your own efforts to prepare for the sale of your business, how much time can you spend verifying accuracy?
The old expression “figures lie and liars figure” still applies. A small database can be misleading.
If you are looking to hire professional advisors, how do you interpret everyone claiming to be the best. Will they present misleading data, or simply keep repeating some of the same mistakes they found online.
And helpful advisors such as attorneys, accountants and financial planners may not have real-world experience selling businesses.
For additional resources go to the SBA’s Office of Advocacy. You will find much more than statistics such as regulatory alerts, research publications, regional advocates, congressional testimony, and a reference library.
The Importance Of Succession Planning
70%
47%
Source: Various studies on family-owned businesses
The Costs Of Selling Your Business
While I’m not going to estimate the possible dollar figures involved, here is a list of the potential costs you may face to sell your business:
- Business Broker/Franchise Consultant
- Business Valuation
- Business Improvements
- CPA Fees
- Listing Fees
- Marketing (eg. Confidential Information Memorandum)
- Legal Fees
- Closing Costs
- Transfer Fee (for franchises)
- Assignment Fee (for some leases)
- Prepayment Penalty (for some existing loans)
- Transfer Taxes (for the sale of real estate)
- Sale Of Business Fee (in some leases)
- Escrow Fees
- Capital Gains Tax
Not to put a damper on things, but this is reality. So early preparation to sell your business will be advantageous to help you manage these costs.
The total cost of selling your business should also take into account that the buyer of your business will also be dealing with certain costs. This adds to the challenges mentioned above in selling a small business.
Since seller financing is likely in the sale of most small businesses, keep in mind that it will reduce the cash you receive at the time of sale. On the other hand, seller financing provides interest on the payments you receive and more favorable tax treatment.
Business Brokers And Franchise Consultants Are Very Helpful
Knowing the challenges of selling a small to lower tier mid-sized business, it is evident that business sellers need the best resources available to help them sell their business.
Business brokers and franchise consultants are likely to become an integral part of your team. In what follows I will use the term “business brokers” to include franchise consultants as well.
Business brokers have the skills, experience and tools essential to get a business sold in a reasonable time frame at a favorable price and terms.
The process should begin with the business broker developing a clear understanding of the business owner’s needs and expectations. But this doesn’t mean that the business owner should select whatever sales price they want.
Setting a sales price too high makes selling a business unlikely. Setting the price too low leaves money on the table. Business brokers have the expertise to properly value a business in order to establish a sales price.
Since the typical small business owner sells only one business, be prepared for more learning from the business broker. But doing your own learning ahead of time will prove beneficial.
Of course marketing the business for sale is a key strength provided by business brokers and they should have the network to get the job done.
The Confidential Information Memorandum (CIM) is a key tool used to market the business for sale. Here is the definition from “The Art Of The Exit” by Jacob Orosz, President of Morgan & Westfield.
A document compiled by a business broker, M&A advisor, or investment banker that describes a company as a potential acquisition target and is used to generate interest in a company from prospective buyers. A typical CIM is 20 to 30 pages long and is only released to pre-screened buyers after they have signed a non-disclosure agreement.
Accuracy of information provided by the business owner to complete the CIM is essential.
Confidentiality is also a big part of the process provided by the business broker. You can see above that release of the CIM requires signature of a non-disclosure agreement.
Another important point about the CIM is the reference to pre-screened buyers. The business broker will screen prospective buyers to determine that they are qualified candidtates.
As this process unfolds, business brokers can be thought of as intermediaries between business sellers and buyers. Selling a business requires much interaction between buyer and seller, and the business broker is instrumental in facilitating this process
Keep in mind that dealing with business buyers can be a tough job.
The business broker will work with the seller and the buyer to negotiate a deal, get the financing in place, complete the paperwork and finalize closing.
As you consider hiring a business broker, keep in mind that the process involves many steps beyond those outlined here. It should help you to interview a few advisors and compare what they offer before making your choice.
One more consideration is that only some states require that business brokers carry a real estate license. So if the sale of your business also includes real estate, verify that the business broker has a real estate license.
Certifications Available To Business Brokers M&A Advisors And Franchise Consultants
Here are some of the certifications available in these related fields. While they convey expertise and experience you should find the advisors that work for you.
Certified Business Intermediary (CBI) - A Certified Business Intermediary is an experienced business broker who is committed to the highest level of professional development the industry has to offer and has ethical values aligned with the IBBA (International Business Brokers Association) standards of professionalism. A CBI has the ability to objectively guide clients through the intricacies of the entire marketing and negotiation process of a business sale, resulting in successful transactions and satisfied clients.
Certified Business Broker (CBB) - A professional certification program focused on financial analysis and accounting pertinent to business sales. Lifetime access is provided to additional training resources. Provided by the Accredited Certification Institute (ACI).
Mergers & Acquisitions Professional (M&AP) - The Mergers & Acquisitions Professional (M&AP) is a program designed to meet the needs of auditing, consulting, deal advisory, investment banking, and legal professionals. The M&AP covers all aspects of the transaction process and provides insight into running a successful M&A boutique. Provided by the Institute for Mergers, Acquisitions & Alliances.
Mergers & Acquisition Master Intermediary (M&AMI) - Successful completion of the M&AMI requirements significantly distinguishes M&A professionals within their field. The Master designation is the only one to require both educational credits and the successful completion of multiple transactions. As such, it provides a distinct competitive advantage when engaging with clients and prospects. Provided by the M&A Source.
Certified Franchise Executive (CFE) - Participants in the Certified Franchise Executive (CFE) program will complete an impressive array of course offerings in business development, franchise management, and leadership to gain insights into franchise strategy and operations. This program is designed to provide information about all phases of franchising to assist emerging organizations that are just starting their journey while helping more established leaders understand how to successfully cultivate a growing enterprise. Provided by the International Franchise Association (IFA).
Seller Financing
The first major idea that I have introduced to help you sell your business is hiring excellent advisors. The second idea is seller financing.
This is not news, and much of what I have written at my website is about this topic. But I think that this article so far gives you more incentive to consider seller financing.
The reality is that seller financing is a common tool used to sell small businesses. What you may not hear much about is the entire note or some of the payments can be sold for a lump sum of cash. More on that later.
Rather than only offering my opinion, here is some of what you can find from other sources.
In the article What Is Seller Financing For A Business from BizBuySell, they list these benefits:
- Businesses offering seller financing are more likely to sell.
- Seller financing increases the likelihood of getting a higher selling price.
- Seller financing brings in profit from interest.
- Buyers have more options and get additional assurance.
They also make the point “It’s similar to a bank loan, but with the seller acting as the bank.” This is partly true but misleading unless you look further.
Just like a bank the terminology used does include the word “loan.” But a key distinction is that the seller is not loaning money to the buyer. They are accepting payments directly from the buyer for the purchase of the business.
Another article from BizBuySell titled “Seller Financing the Sale of a Business: Do's and Don'ts,” makes the point “DO assess the risks. You will be tied to the business long after the sale is complete."
The time-frame they refer to depends on the length of the promissory note. The key advice is to properly assess the risks of seller financing to a particular buyer before making a decision.
Here is where it is advantageous for the seller to act more like a bank, without the regulations and restrictions banks face. A credit history on the potential buyer is a minimum starting point.
The way the note is structured is not only important to you and the buyer of your business, but to a buyer of your business note as well. Here are a couple such ideas:
If you are selling real estate in addition to your business, you can offer seller financing for each aspect. If you ever consider selling the note, it is preferable that you create a separate note for the business, and the real estate.
If the note includes a balloon payment, it is preferable that the balloon be made part of the real estate note, rather than the business note.
So it will help you to understand the possibilities of seller financing, how to create a business note, and to be mindful of selling the entire note or making a partial sale in the future.
Then think about possible scenarios moving forward. What might be the right combination of the terms of seller financing that you offer? And how does that match up with a partial sale of the note, say a year or two after you sell your business?
To learn more take a look at the Recommended Reading below.
Recommended Reading
Make Your Business Notes Profitable.
Seller Finance Your Business In 2024
Do You Plan To Sell Your Business To Buy Another Business?
Valuing Your Business For Resale And To Sell Your Business Note
Are You Prepared To Sell Your Business?
If you ever have a note for sale including business notes, real estate notes, structured settlements, divorce liens and land notes, please complete a worksheet and I will get to work for you.