This article provides a foundation for business owners who have never sold a business and are curious about what it will entail. A foundation includes 1) knowing the state of a ready-to-sell business and 2) adopting the mindset of a successful seller. Selling a business requires significant preparation of the business and the mindset, so the more time to prepare, the better.
What Percentage of Sellers Actually Succeed in Selling Their Business?
If you conduct online research into this question, you will see a low success rate ranging from 10-30% of businesses listed for sale that actually close. There are many possible reasons for this low success rate. Relative to shopping for homes or cars, shopping for businesses has more risks.
- Buyers are not as compelled to buy businesses as they are cars or homes
- Business risks are more difficult to fully understand in due diligence
- Businesses are more difficult to compare against similar businesses
Yet this presents an opportunity for any realistic business owner to stand out and succeed, simply because their competition is weak.
What Are the Characteristics of Successful Business Sellers?
Here are some of the important characteristics of business owners who successfully sell their business.
- Learns what it takes to sell a business well in advance
- Organized, thorough and prepared
- Has an appropriate team of advisors
- Realistic about the market value of their business
- Motivated to sell
- Understands who can be a successful / ideal buyer
- Able to put themselves in the buyer’s shoes
- Willing to pick their battles in negotiations
- Open to seller financing and / or earnouts
- Transparent
- Responsive to buyer requests
- Will provide a non-compete agreement
- Will ensure a smooth transition with training
Training is going well. I’m probably working too much, but I want to make sure he has a good start.
seller of a dry cleaning business 18 months after COVID shutdown
Going great. Raymond has built a great business.
buyer who bought a laundromat with an sba loan, then left corporate america and bought the dry cleaning business mentioned above with another SBA loan.
How Attractive are the Alternatives to Selling My Business?
This is a great question to ask yourself early in the process. Once you have an idea of a range of values for your business, you can decide if now is the time to sell it. You can weigh the benefit, after selling costs and taxes, against the alternatives. These are elements of exit planning.
Benefits of Selling the Business
- Retire or work less
- Enjoy family, life, hobbies, travel
- Reduce stress and focus on health
- Lock in the gains
- Pivot to other business opportunities
Benefits of Keeping the Business
- Continue to be my own boss
- Eventually pass on to family
- Earn profit on “auto-pilot”
- Expense certain benefits
- Beats all other alternatives
Check-In On The Reality of Selling a Business
Take note of these things:
- Are you excited, intrigued or demoralized by the thought of no longer owning and operating the business?
- What will you do when I exit the business – what will a normal day look like?
- Would it be better or worse to sell the business in the future?
Selling a business requires significant effort, especially if you are actively engaged in running the business. It can take months or years to find the right buyer. Before embarking on this endeavor, you want to make sure you are committed to selling. Many owners know when it’s time to sell. Others have a goal for when they want to sell in the future. Still others base their interest on the market. I highly recommend reading Should I Sell My Business or Keep It?
When Should Business Owners Start Thinking About Exit Planning?
Business owners should understand that they need exit planning advice early for several reasons. Arguably, the exit planning process should start within a year of starting a business.
- Sellers may need time to improve performance and the performance trend
- Sellers may need to make additional changes to optimize the business for sale
- Buyers will want at least 3 years financial records: a business owner may need 3 years to tighten records and accounting
- It can take a year or more to sell a business
- Buyers may want the seller to stay on as an employee or consultant as a condition of the sale
See Exit Planning and Business Timing, an article that discusses the challenges of timing business cycles.
How Do I Know if Selling the Business is Financially Viable?
Business owners can pay for a professional business valuation or simply get a free estimate of value from most business brokers by providing 3 years of income statements and a current balance sheet. Many business owners have their interest in selling curbed by the valuation they receive. It may be a disappointing number, or it may inform them that it won’t meet their financial goals.
Example: Jon learns that his business can sell at a multiple of 2.5 times earnings. It’s not as high as he was hoping for. He is healthy enough to work a few more years and wouldn’t mind doing so, although his wife would like him to retire now. Jon reasons that the proceeds from a sale today can be matched by just working a few more years. This may be a viable plan as long as his business holds or improves.
How Can I Test The Waters on Selling a Business?
Take these simple steps over the course of a week to understand your ability and commitment to selling a business.
Explore BizBuySell
Call an SBA Lender to Ascertain Lendability
Run it By a Business Broker
Imagine Life After an Exit
- Explore BizBuySell: The number one platform for traditional businesses for sale is BizBuySell.com. Spend an hour setting filters and searching for businesses similar to yours. After a while you will get a sense of the asking price as a multiple of earnings for businesses similar in scope and size.
- Call an SBA Lender: Find out if your business is lendable. This will expand your buyer pool and minimize the amount of seller financing you may be asked to carry.
- Run it By a Business Broker: Get an idea of the valuation, sales process, sales timeline and fees to list your business. Understand your role and the extra effort required to sell your business while simultaneously running it.
- Imagine Life After an Exit: Determine if you want to work for the new owner or what you will do when you leave the business. If you have no good answer, check your motivation to sell.
How Can I Succeed in Selling a Business for the First Time?
A business owner with an exit in mind will increase their chances of success with proper preparation. Preparation does not just mean organized records and documented performance. Preparation includes soft skills such as empathy and understanding of buyers. The overwhelming majority of potential buyers of businesses never complete an acquisition. While there are no formal statistics on buyer success, it is not uncommon for industry professionals to estimate that the number of buyers who succeed at acquiring a business is “less than 10 percent” or “in the single digits.” This presents a huge opportunity for prepared sellers to succeed against all of the other businesses for sale.
What are the Barriers to Success in Selling a Business?
At a high level, a business listed for sale may not sell because of the buyer, the seller, the business, or the external environment.
- Buyer lacks commitment
- Buyer lacks skills
- Buyer lacks financial ability
- Buyer does not gain your trust
- Seller is unorganized
- Seller is unrealistic
- Seller is unmotivated to sell
- Seller cannot gain Buyer’s trust
- Seller wants carve outs (see What is Included in the Sale of a Business)
- Seller wants to continue in the industry
- Business involves too much risk
- Business requires too much effort
- Geopolitical, economic, environmental, regulatory factors
What Team of Advisors Can Help Me Sell My Business?
Partners, spouses, family members, personal mentors and financial advisors may be able to assist in shaping your goals and strategies for selling your business. Here are some important advisors to consider:
CPA
The CPA is often the business owner’s most trusted advisor. Once you let your CPA know you are considering selling your business, the next step is to review your accounting practices and make any necessary changes to simplify reporting for buyers. Personal expenses or family perks should be minimized to a level most buyers can understand and accept. Items not at market value may need to be adjusted. For example, if you own the real estate and pay yourself higher or lower than market rent, your rent expense needs to be adjusted. Allocation of income or expenses across divisions may need to be changed or clarified. Cash items may need a formal tracking system to show buyers so you don’t leave money on the table. You and your CPA should discuss the tax implications of asset allocation in the event of a sale.
It’s quite possible your CPA or accountant is not as familiar with the financial issues relating to a sale as a good business broker. Putting them both in touch early is a good thing, especially because CPAs and accountants may be very difficult to access during peak tax times.
Business Intermediary
Do not hesitate to talk to business intermediaries well in advance of an exit. Business brokers can advise businesses with revenue up to $5M. Businesses with revenue over $10M may need to seek out M&A Advisors. Businesses with revenue between $2-20M are in the gray zone and could benefit from the help of high-end business brokers or boutique M&A firms. Some business intermediaries may not give you much of their time if you are years from a sale. Other intermediaries will be glad you contacted them well in advance.
Exit Planner
Businesses with revenue of over $1M may consider exit planning services. Smaller businesses can also seek exit planning services, but these services may be too expensive for small businesses. Nonetheless, these smaller owners should be familiar with exit planning concepts if not willing to pay for exit planning services. Some business brokers may have exposure to exit planning services or may be certified themselves. M&A advisors may offer exit planning services well in advance of a sale. Full time exit planners are very good at helping business owners chart a path that encompasses personal, financial and business goals with an eventual exit in mind.
Attorneys
Transaction attorneys are critical to business sales that involve seller financing, earnouts, complex deal structures, high risk, and deals done as stock sales. The attorney’s number one goal is to protect the client. It is important to find a good match for your size and complexity. It is also important that both buyer and seller attorneys are a good match. Things can be lopsided or unnecessary if a small business attorney is representing one side and dealing with an M&A attorney on the other side. Business owners need to learn how to properly screen for an attorney that will protect their interests and enable a good deal to go through.
Yourself In Their Shoes
As the seller, you should place yourself in the role of a buyer for someone else’s business (not yours because you’ll be biased). Assume the mindset that you are going to buy someone’s business and think about what you need to know to take that leap to acquire a business. The seller knows all and you know nothing. Your requests for documents and meetings and proof will only go so far. In the end, there is a knowledge gap between you and the seller that will require you to take a leap of faith.
As a seller, your job is to empathize with the buyer’s fears and concerns. You will know once you meet the best buyer for your business, and then it is your job to help that buyer close the gap. After all of their investigation and due diligence, the only thing that will close the gap for the buyer is their faith and trust in you. A seasoned business intermediary that understands people, communicates well and sets proper expectations will be an invaluable resource on how buyers think and behave.
Extra Steps to Become a Successful Business Seller
Brokers and sellers love qualified and motivated buyers. Consider these extra steps to elevate your ability to attract and retain buyers, set yourself apart from other sellers, and help yourself and the buyer cross the finish line.
- Discuss the Strategy for Confidentiality: Communicate your concerns and the broker will be able to propose the right process for divulging information and preserving confidentiality. In some cases, a business owner may want every inquiry to be approved by the owner before the broker is allowed to send the prospective buyer just an NDA.
- Be Responsive to Your Business Broker: Behind every broker request is an interested buyer evaluating your responsiveness and comparing you to another 5-10 businesses for sale.
- Study the Biggest Mistakes Owners Make When Selling Their Business: Google this search phrase and ready every article. Complement that with a discussion on the topic with your broker. Read these books and consider exit planning well in advance.
| Links* | Book Recommendations |
|---|---|
 | Expensive Mistakes When Buying & Selling Companies – Richard Stieglitz & 3 others Issues selling larger businesses that high end brokers and M&A advisers may face |
 | Built-to-Sell – John Warrilow An easy read by the founder of the Value Builder System |
 | Walking to Destiny – Christopher Snider An in-depth framework written by the founder of the Exit Planning Institute |
Winning Mindset for Successful Business Seller
Once you have prepared and organized the content a buyer will need, it’s time to work on a winning mindset. A motivated seller who lacks emotional intelligence will struggle. The good news is it doesn’t take much to elevate yourself from your competition, i.e. other sellers. See What are the Inescapable Truths of Buying or Selling a Businesses?
- Ditch the Take it or Leave It Approach: Your business is not a hot piece of real estate. Business buyers rarely show up two at a time. They don’t offer the asking price, rarely offer all cash, and don’t get into bidding wars. While it is good to keep the window for a sale open as long as a year or more, there will be more inquiries early in the listing, so don’t ignore a solid early offer.
- Be Patient With the Volume of Requests for Information AND Responsive: Buyers are trying to close the knowledge gap between you and them. You are the only one who can facilitate that process. While you may spend a considerable amount of time briefing your broker to handle this, some buyers keep the requests coming, and some requests cannot be anticipated. Their willingness to spend more time on your business is a good sign. Buyers often react to slow seller responses with suspicion and doubt. They may conclude the business is disorganized, the seller is unmotivated, the seller is scrambling to cover up issues, or that their time is better spent looking at the next acquisition target. If a lender or the buyer’s CPA or attorney are involved, even more patience is required.
- Tune In To Buyer Emotions: Buyer-seller meetings are not one-sided. As you answer the buyer’s questions, ask them about their qualifications, goals, and concerns. Find a way to address their concerns about your business. Quiz them on their capabilities and goals. As a successful seller, your job is to demonstrate you are aligned with what is important to the buyer. You have to uncover their emotions, triggers, and non-negotiables. If the buyer has high confidence in you despite any doubts, they will take that leap of faith to buy your business.
- Have a Mindset of Partnership and Facilitation: When you find a buyer that instills confidence in you, take them under your wing and let them know your goal is to help them be successful. This kind of genuine communication will go a long way to soothing the nerves of tentative buyers.
- Be Patient With Due Diligence and Continue to Take the Business Forward: While you need to be quick to respond to requests for information, you need to wait patiently for the Buyer to process that information. This may seem unfair, but that’s the reality for successful sellers. Remember, it is your job to close the knowledge gap between yourself and the buyer. Along with patience, you need to steer the business in the right direction and continue to forward progress. The sale of a business can take a year or more. That is a lot of time for performance to improve or decline. During the process, buyers want to see the latest information including month-end, year-to-date or trailing twelve month financial statements.
Build a Buffer for Minor Issues
Build a buffer in your negotiations that allows you to accept minor issues and renegotiations during due diligence. If the issues are minor and within the tolerance you built into the escrow and due diligence process, then resist the temptation for perfection. Standing firm with no concessions for legitimate findings during due diligence will put off most buyers.
Accept The Leap of Faith Required to Sell a Business
If what you have read so far sounds scary and you feel you would be taking excessive risk, then you are starting to understand why the percentage of prospective buyers who actually buy a business whittles down to the single digits. Do your best to minimize risk and protect yourself, but you will have to come to terms with the pillars of truth that exist with every business sale. There is no perfect deal, you will not meet a perfect buyer, and you will have to take a leap of faith at some point in the process that you have found the best buyer and the best deal. See What are the Inescapable Truths of Buying or Selling a Businesses?