Unlike selling a house, putting a business “on the market” isn’t quite as simple. There are four different classifications of buyers, each approaching your business through a unique lens.
But before diving into attracting buyers, there is essential groundwork to make your business appeal to buyers. If you don’t start here, finding buyers will be a waste of energy.
Step 1: Valuation
Bottom line, setting the right price attracts buyers.
The biggest challenge you face is a significant difference between your perception of value and what the buyer is willing to pay. You need to understand that the value is not determined by the amount of debt they have to pay off, how long you have run the business or what a buyer can achieve with the business “opportunity.” It is based solely on what you have achieved in your business.
Buying a business is an investment. It’s an investment that comes with more risk than many traditional investment options. Buyers have multiple routes for investing their money. The buyer’s return on the investment for the business must be more appealing than the stock market, real estate or interest at the bank.
This is all tied directly to attractively valuing the company. If the seller is realistic in the sale value, then there will be numerous buyers.
Step 2: Financing Availability
Most business sales include some type of financing. The availability of banks lending money directly affects the seller’s ability to find buyers. Simply put, when banks are loaning, either directly or with SBA, then there are more buyers. The key things to look for are low interest rates and affordable lending.
This little nuance emphasizes why timing is so important in your exit strategy. Factoring in the current market conditions increases your chances of finding a good buyer who can come up with money.
Step 3: Fees and Taxes
All right, this isn’t necessarily designed to make a business more attractive to buyers. This is strictly to save the deal from blowing up in the end. Too many deals end in flames because the seller walks out when they realize the real costs to close the deal.
After professional fees, there are still State and Federal income taxes that come out. Especially when not done correctly, this can take a huge chunk out of your profit margin. Sellers will need professional help to mitigate taxes.
Depending upon the transaction size, you may only need your attorney and CPA. Larger transactions might need a broker, valuation expert, CFP, banker, estate attorney and real estate broker.
Understand the costs before you start the selling process. This drastically increases your chances at successfully selling your business.
Buyers by Business Type
Once you have the foundation work done, classify what type of business or opportunity you are selling. Each classification attracts a different type of buyer. It’s extremely important to understand what you are selling in order to identify the correct buyer.
Selling a Job
Small businesses typically equate to a job that the owner controls. You can identify this by calculating how much it would cost to hire someone to do your job. If the business doesn’t make much more than that salary, this is a “quality of life” business.
In other words, you are selling a job.
These businesses will sell if presented correctly, but you have to understand the value to a buyer. Buyers interested in a job are looking to control their own destiny. They are in various stages of life.
Here are some of the common scenarios:
- Desire to exit the corporate world;
- Recently laid off from a job;
- Retiring early;
- Relocating to the area.
They are out looking but you have to find them.
Selling an Opportunity
Just like in the housing market with house flippers, there are buyers looking for the right “flipping” opportunity. These buyers approach your business as a fixer upper.
Different strategies include:
- Develop into a recurring revenue stream;
- Consolidate into their other business;
- Fix and flip (or resale after building in revenue drivers).
Most of these types of buyers are very smart and sophisticated. Additionally, they have cash. They are always on the lookout for the right opportunity, and are willing to buy when the time comes.
These buyers are usually referred to as Private Equity buyers, representing investment funds. They often raise hundreds of millions of dollars from wealthy investors who put their money into these high-risk buyers.
Most professional buyers are looking at minimum EBITDAs (Earnings Before Interest, Taxes, Depreciation and Amortization) of $1,000,000 before they even want to talk to you.
There are industry specific professional buyers that look at businesses with lower EBITDAs. In those cases, they are targeting particular intellectual property, location niches or products with high potential.
This is probably the class of buyers that goes unnoticed the most. Vertical Integration buyers are key vendors or customers. Many businesses acquire other businesses in the complete value chain. Rather than outsourcing, it’s profitable to bring your services in-house.
They often have money. The other appealing aspect is removing the “profit” you charge them.
If you are looking to sell your business, connect with me today. Together we can identify which buyer route makes the most sense for your company and position you for a successful transition.