How Do I Start the Process of Selling a Small Business?
As with so many things, start with ‘why’. Why do you want to sell? The many reasons range from exiting at the peak of success in order to maximize value, to retiring, to one or more aspects of disappointment with continuing to operate it. Asking yourself ‘why’ has much to do with your level of motivation to sell, and your level of motivation is going to impact the all-important measure of value — the sale price.
But most first-time business sellers skip ‘why’ and start asking ‘how’. How is bewildering for many, and not knowing can, at a minimum, waste a lot of your time while, at worst, get you a very bad deal.
The third-party method that is best understood is listing the business with a business-for-sale broker. If work skills were genes and a local real estate agent had a child with a local attorney, they might produce a small business broker. However, I recommend neither parent to do this work, because the lawyer will cost too much and the real estate agent knows too little to be successful (though both types, when hungry for work, have tried often enough.)
Business brokers can take a lot of work off of the shoulders of the business owner, providing a valuation of the business (biased to the high side, of course), handling the legal paperwork, negotiations, and lead generation so that the owner can just concentrate on continued business operations. This does come with a fee which is customarily at least 10% of any resulting sale transaction.
But brokering is also not the only way for an owner to successfully exit a business, and I’ll outline several more here.
CLOSE-PARTY TRANSFER: This applies to businesses that run more than one generation in a family (generational transfer), businesses sold out to existing partners or employees, or other sales that come from an already existing close relationship of the owner. These can be very advantageous in that the buyer may already understand the business and what is being purcahsed very well and there is a lot more trust existing between buyer and seller. There are also drawbacks, though, including the potential for the past owner to be regularly called back in with questions or to help solve a problem well into the future, or a damaged relationship if negative surprises for the buyer turn up after the sale.
CLIENT SALE (B-to-B): Some businesses may have one or a few large clients that make up a majority of its sales, and it may be fairly easy for one of these key clients to assume the business for a couple of accretive reasons. One would be to then enjoy wholesale sourcing of whatever they were previously buying from that business they are acquiring, allowing those reduced internal costs to make it more competitive or profitable. Another would be to generate a new revenue center by continuing to run that business as a subsidiary and sell to one’s competitors — giving the new owner valuable data about how much business its competitors are doing! Approaching a client must be done with great care and confidentiality as that client who knows a supplier is for sale could get cold feet about continuing to buy from the supplier if a deal isn’t made.
COMPETITOR SALE (MERGER): Businesses in competitive, growing industries often consolidate to gain operating efficiencies and competitive advantages. In this case, being a small but successful fish can make a business attractive to a bigger fish that would be happy to gobble it up and gain more aggregate market share. Approaching a competitor must similarly be done with great care as knowing who wants to get out could launch that competitor into finding other market ways to attack the marketplace of clients of the business being sold and essentially take the clients away without paying for the business. Along with the client sale model above, an excellent attorney or consultant may be a good idea to approach the target buyer anonymously through this proxy and sign confidentiality agreements with liquidated damages clauses to protect the selling party’s interests if, after learning who wants out, a deal doesn’t get done.
DO-IT-YERSELF: Though not recommended for a first-time seller, DIY can be a viable option for a potential business seller who has the time. Many industries have one or more trade journals or magazines which have classified features, and listings can be taken out advertising, in vague terms, a business sale opportunity looking for buyers to start generating leads. As leads come in, following-up with conversations to vet the inquirer’s level of interest and ability to pay requires an excellent, discerning negotiator who doesn’t blurt out too much too soon. Some consultants (like myself) with experience can be proxies for DIY’ers that want more control and involvement in the sale but can enjoy an experienced helper for the initial anonymity with interested parties and as a 2nd mind thinking through the negotiations.
No matter what methods are attempted, the number one misconception of most small business sellers is how much their business, as a self-contained asset, is really worth. Business owners who have put their heart, blood, sweat and tears into building a business up often have difficulty separating the emotional value from the actual asset and revenue value that the business represents, and still other sellers in negative circumstances think that an under-performing business is still worth enough to get them out of the debts they have accumulated or sunk investments they have already made keeping it going. Believe me, they don’t easily listen to the truth, but they still need to hear it.