The costliest mistake you can make when considering selling your business is talking to a business broker.
Don’t get me wrong, there are some outstanding business brokers out there, especially if you’re an absentee owner with annual profits of over $2 million. But, unless you fit into that category, there are some things you need to be aware of before listing your business for sale.
I might piss off a few friends with this, but if you’re looking to retire in the next 1 to 3 years, I’m going to show you why now is NOT the time to list your business for sale with a broker.
Here’s why.
Your most valuable asset is not your business, cars, home, or investments…
Your most valuable asset is your time, and it’s in finite supply. Once you spend all of it, you can’t get any more.
It takes time and energy to sell a business. Not to mention the emotion of selling something you’ve spent 20 to 30 years investing your blood, sweat, and tears into.
You may be ready to sell now, BUT is your business ready?
If your business isn’t ready, it can sit on the market for years with zero offers anywhere close to what YOU think it’s worth.
You’ll end up paying the broker $30-50K up front to create a CIM (confidential information memorandum). A CIM is a professionally made brochure that tells buyers important details about your business. The CIM entices qualified buyers to look deeper at the company books. Your broker might even get your company “SBA prequalified.” SBA prequalification means a lender looked at the CIM and said, yep, IF this is all true, we can loan on this business to the right buyer.
Let’s face it: Lenders get paid to write loans, so naturally, they get your business “prequalified,” hoping a wealthy buyer will come to them when it’s time to apply for a loan. They don’t tell you that once a savvy buyer goes through due diligence, they’ll have a pretty good idea of the cash value of the business based on its financeability.
Without a lender, you’ll never get anywhere close to the asking price unless the buyer has enough wealth to cover the loan if it defaults. Most people looking to buy small businesses have some wealth but want to increase their wealth by purchasing a strong company.
Your business has more to do with their qualifying than their personal net worth.
So what happens when you list your company before it’s ready?
You get offers under the asking price or no offers at all.
Some sell at a much lower price, others offer financing, and others just close their doors.
Worse yet, if you sell at a lower valuation than expected, you still have to pay the broker’s commission, usually another 8-10%.
Simply put, the value of your business is directly related to what a lender will loan to a buyer.
For your business to be ready to sell, make it look so enticing to lenders that they will be compelled to give buyers a loan.
What stops a business from being lender-ready?
Before I answer that, let me describe how banks value small businesses. Valuation is based on a multiple of earnings, AKA a multiple of how much you, as the owner, take home in profit, benefits, and salary, often referred to as the seller’s discretionary earnings (SDE).
It’s technically a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), but I’ll use SDE for simplicity. EBITDA factors in payments for taxes and debt and adds them to profit, raising the price.
A best-in-class business receives a much higher multiple of earnings because the company makes lots of money and runs well with little or no owner involvement.
Warren Buffet and Charlie Monger don’t run the companies they own. They invest and make returns from great companies.
A company that provides sizeable returns with little or no owner involvement is a financeable business.
For instance, apartment complexes are businesses with real estate. When they are located in nice neighborhoods with strong management in place, lenders regularly agree to valuations 20 times the net profit of a property because an experienced buyer can anticipate consistent returns. Most buyers aren’t going to manage the property; rather, they invest for cash flow, appreciation, and tax savings.
The “business” provides consistent cash flow and has a high probability of repayment. Therefore, it’s easier to get financing.
It’s different with conventional businesses, though, because so many owners never position their companies for exit, often closing the doors even though their company provided a great lifestyle for many years.
It’s a sad reality.
We invest in small businesses because we have a proven formula for increasing the exit multiple. We find great companies, insert our formula into them, and then acquire other complementary companies and grow them for cash flow, appreciation, and tax benefits.
Now, to answer the question, What stops a business from being lender-ready?
Below are some of the deal killers to high valuations – not in any specific order:
- Owner-centric businesses – If you can’t vacation for 6 weeks, you have an owner-centric business; if you make a lot of money, you have an owner-centric lifestyle business.
- Low seller SDE – You do all the work and are the last to get paid. How can a buyer replace you without being able to pay themselves?
- An owner who is the best salesperson in the company – This is extremely hard to replace because no one has the confidence and belief in their people and their company like an original founder.
- High customer concentrations – if a buyer loses one or two of the biggest customers, the business will fail.
- High vendor concentrations – If you have one supplier, what happens if that company goes out of business or makes significant changes that affect your pricing or ability to procure products or services efficiently?
- There are n
- No systems for attracting new customers while getting previous clients to purchase repeatedly – word of mouth is not a marketing system; it’s an unreliable way to build a business.
If you have one or all of the above, it’s definitely not time to list with a broker because your company lacks financeability because there’s no way for you to transfer the value from your business to a suitable buyer.
There’s an old expression that applies here…
You can’t see the entire picture from inside the frame.
You’re a smart entrepreneur. But because you’re inside the frame, you can’t see the whole picture the way others can. There are holes in your business that make selling a challenge because a buyer won’t be able to get enough financing to give you what you need to exit.
If you hire a broker, they’re going to find a way (and make outlandish promises) to list your business at your asking price, knowing darn well that the only buyers who can afford to pay your price are trade buyers, and even trade buyers use financing.
Trade buyers are companies that offer similar products and services to yours and often pay higher multiples than anyone else.
You may be thinking, why don’t I sell to a trade buyer?
That’s a great point, but imagine trying to sell your business to a competitor. During due diligence, they find out everything about your company.
They’ll investigate all of your internal secrets, including your tax returns, assets, cash flow, customers, vendors, and employees. If they have no intention of buying, they might be able to sabotage your company by stealing employees, customers, and vendors.
As I said earlier, there are times when listing with a broker makes sense, but wouldn’t you want to know your business’s marketability first?
Listing brokers reading this are thinking…
Yeah, but we offer advisory services and exit planning to help sellers prepare for a sale. That may be true, but the ulterior motive is to list your business for sale so they can get an up-front fee and a percentage of the sale, and by sheer volume, they hope to earn commissions.
Whereas we offer advisory services, our motive is to buy great businesses. If your company is not ready to be sold because it’s not financeable at the price you need to exit, we can give you an exact road map to the exit of your dreams. In as little as 6 months, we can help you implement the strategies that will get you to the finish line.
What do you do if you want to exit right now? If you’re ready to exit now, we’ll give you a fair offer, and often, we can close in as little as 21 days.
Either way, if you need to sell now or are considering selling in the next 2 years, schedule a confidential call so we can assess your company and give you a full market price offer.
If you like the offer, we’ll buy your company.
If the offer isn’t what you need to exit, we can provide the road map to buyer financeability so you can retire in 6 to 18 months.
Don’t put this off.
You may not be ready to sell now, but get your business ready before you are put in a position where you have to sell. Most owners wait until a life event happens, and then they are forced to sell at whatever price the market will bear, often closing their doors one last time.
I hate to see it happen, but the truth is that over 1500 businesses close their doors every day in the US alone.
This doesn’t have to happen to you.
To schedule a call today, go here.
A comfortable retirement you’ve always hoped for may be closer than you think.
About the Author: David Mulvaney moved to Florida from Wisconsin in 1987. In 1992, he acquired a home services company with 98% seller financing. By 1994, Dave converted the company to 75% commercial services and sold the company in 1998 for over 10 times the original acquisition cost. Since then, Dave has owned or owns controlling interest in profitable companies in the following sectors: manufacturing, engineering, global distribution, home services, commercial services, e-commerce, SAAS, residential, and commercial real estate. His companies have grossed over 250 million in top-line revenue over the past 33 years.
Dave buys and builds great companies and advises entrepreneurs on how to exit profitably on their terms. To Book A Call, Go Here.