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Three Myths of Selling a Business

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Most business owners will only sell a business once in their lifetime. Given that selling a business can be the single most important financial event in a business owner’s lifetime, it should be helpful to have a basic understanding of some of the common myths or misunderstandings when it comes to selling a small or medium sized privately-held business. 

 

Myth #1 – I Can Sell It Myself

Even business owners that are experienced and qualified to sell a business are better served hiring a professional, third party intermediary. Of course an owner can save money by selling a business themselves but at what cost or risk?

 

The first problem with a “for sale by owner” approach is the loss of any confidentiality with respect to customers, employees and competitors knowing about the sale of the business. Unlike real estate, the sale of a business is not something that should be freely and openly advertised because of the inherent risks. News of a business sale and the potential loss of customers or key employees could be devastating to the current and future value of a business. This risk alone could easily exceed the potential cost savings from a “do-it-yourself” sale and justifies the use of a qualified, professional third party such as a business broker to act as a confidential intermediary with prospective buyers. A primary role of a business broker or business intermediary is to pre-screen prospective buyers by requiring completion of confidentiality agreements and buyer background information before releasing any confidential information that could compromise the selling company’s competitive position.

 

The second and just as compelling reason is that the use of a professional that knows where and how to confidentially market business sales to the private business buyer marketplace will help make sure you do not leave money on the table. Exposure of a business sale to a much broader marketplace is the only way to know that you obtain the maximum price the marketplace will bear. Many businesses have been sold to a friend, competitor or solicitor that comes along before the business has been exposed to the larger marketplace.  Can you imagine stocks and bonds being sold in this fashion? I can’t.

 

There are several other reasons that selling a business should be managed by a qualified professional. Finding a buyer at the beginning of a business sale and having an attorney draft the contracts after finding a buyer is only a fraction of the overall process. Minimizing time spent with non-qualified buyers, coordinating the exchange of due diligence information, guidance regarding customary deal structures and options, identifying key resources such as financing, legal, accounting, banking, estate planning, etc. are all functions that a professional business broker provides.

 

Myth #2 – I Know What It’s Worth

All too often, an asking price is based on money invested in the company, an amount needed for retirement or the sale price of some other company in the same industry. Unfortunately, buyers will not arrive at an opinion of value based on these factors since they do not represent the true fair market value of a business. Other times, an industry “rule-of-thumb” is used to arrive at a business value.  Rules of thumb in particular fall into the “I know just enough to be dangerous” category because rules-of-thumb are very dangerous. A rule-of-thumb is like a statistical average and as such will almost always result in a business being either over-priced or under-priced because rarely does an average represent the actual value of a specific company.

 

Myth #3 – It’s Like Selling a House

Preparing to sell your house may take a few weeks and selling it a couple months more.  Once you get a satisfactory offer, you sign a standard purchase agreement, wait for escrow to close and turn over the keys. 

 

Selling a company is much more complex and couldn’t be more different.  A successful business sale usually requires a great deal of preparation ranging anywhere from several months to three years depending on the owner’s financial needs and goals. Furthermore, the sale of a business is difficult to predict and can range from 6 months to several years. Finding the right buyer for a business requires; a buyer that is financially qualified, looking for a business in the same industry, same price range, same geographic area and happens to like the particular business being sold. All of these factors make finding the right buyer for the sale of a business very challenging.

 

Even completion of a satisfactory offer is only the beginning in a business acquisition and still far from meaning the transaction will be completed. Due diligence and supplemental transaction documents common in business acquisitions often result in cancellation of an offer and the process of finding a buyer starts over.