Thursday, March 7, 2019

Should I use a business broker to sell my business?

You've worked hard and built a successful business, but for whatever reason you need to move on now. So how best do you go about selling the business? Is there even a market for small businesses like yours?

What Sells

1. Businesses that are making a profit

Whether your business is likely to find a buyer on not depends on a few factors. The first is you being able to prove that it's a viable business ie. a business that is generating more in revenue than it's paying out in expenses.

Some business owners not making a profit argue that the books do not show the full picture, or that they've been reinvesting profits into the business. They come up with a million other reasons for the lack of clear profit. They also try arguing that the business has reached a level where it now needs outside investment or that it needs someone who can market it.

None of those "excuses" work. If you've been running the business and failing to demonstrate profit, buyers will generally see you as having failed to create a viable business. And, having failed, you are now bailing.

2. Businesses that are making a profit after paying a fair salary to the owner

If you've been spending time in the business, working in the business, you need to show that the business is generating enough money to pay you a fair salary for that time AND still have profit left over! It doesn't matter whether you've taken a salary or not. What you need to demonstrate is that the business is generating enough to be able to pay you a salary for your time, a return for the capital you've invested and a decent return for the risk you've taken (in opening a business).

3. Businesses that are not dependent on the owner

Buyers are highly sensitive to this. They ideally want a business that is being run by employees, not a business being run by the owner. Any business being run by the owner is a business where buyers see the main asset as being the owner himself. And if they buy the business, the main asset of the business will be walking out of the door on day one. That's not something buyers are comfortable with; they see it as a major risk. (There are lots of other things buyers want to see)

Don't tick any of those three boxes above and you'll probably find it impossible to sell your business. Tick only one or two of those boxes and you'll still find it very, very difficult to find a buyer (though, admittedly, you won't find it difficult signing up with a business broker. Many brokers will take on any and every business and exude confidence about being able to sell it! Most brokers do not succeed in selling even 10% of the businesses they take on.) If you've got a loss making business, it's better to accept that it isn't as attractive a target as you'd like it to be ...and attempt selling it for what it is - a distressed business.

So how do you go about the sale?

Assuming you tick the three main boxes above you now have a choice on how you go about selling the business. Some business owners choose to sell the business themselves. Others choose to use a business broker.

Selling the business yourself 

While some business owners successfully sell their business themselves, do not underestimate the amount of knowledge and skill a successful sale requires. Selling a business is not like selling anything you've ever sold before. Finding buyers is extremely difficult and keeping them on track to a completed contract is even more difficult (over 90% of even "serious buyers" drop out somewhere along the road).

You need to get a ton of documentation ready. You need to get your accounts recasted. You need to identify and fix numerous flaws that exist in your business. Yes, every business has flaws. You may have employee or supplier contracts that are outdated and not in line with current law. Your T&Cs may need tweaking. You'll have to extricate yourself from any personal guarantees provided to landlords/suppliers of hire-purchase equipment etc. If you're a limited company you'll have to draw up a proper shareholder agreement, hard copies of all the board level resolutions taken, budgets and financial projections, a proper business plan and continuity / disaster recovery plan. Buyers (or their lawyers) will ask for all this stuff! If you occupy a leased property, you'll have to square your landlord and ensure he'll transfer the lease once you've found a buyer (a "little detail" that many vendors forget and which often derails deals). If you're UK based you'll have to commission an EPC from an authorised agent and if based in the US, Australia or elsewhere., there are various other local regulations you'll need to meet.

So start early. Allow several weeks / months for thorough research and much reading. Buy a few good books on how to sell a business. And set aside a lot of time for the selling process itself and the due diligence that follows.

And always be extremely cautious about entertaining any unsolicited offers you get for your business. It's almost always a good idea to walk away from those!

Using a broker or M&A professional to sell the business

No large business is sold by the owners, they are always professionally handled by a business broker or a corporate finance firm or similar other company.

With smaller businesses the size of the business will determine whether it's best off being handled by a broker. But finding the right business broker can be a task in itself given the bad reputation brokers have and the numerous exploitative business brokers there are around.

For information on business brokers, how to choose the right one, the fees brokers charge and other broker related information this collection of articles should be of help (and there are a few more here).

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