The Winning Recipe to Most Business Sales
When selling a business, follow these steps to achieve best results:
STEP 1 - PROFILE YOUR TARGET BUYER
Some businesses are best suited for passive investors, others for owner-operators working within the business. Some businesses are geographically anchored, where others are relocatable. Write a description of your ideal buyer including required skills or expertise, liquid capital, location, and participation level. This is your "target buyer". Knowing your target buyer will help you know where to find them and recognize them when they cross your path.
STEP 2 - POST ADS & BEGIN PROSPECTING
There are several excellent websites that list businesses for sale. To find the best sites in your area, simply google "business for sale" and see which sites appear. Be prepared to pay around $250/mo. for decent exposure.
Be sure the ads are confidential, meaning the reader cannot identify the business or exact location by the ad. In most cases, you will receive more inquiries by saying less in the ad than if you tells the whole story. Only tell as much information as you need, just enough information to intrigue your target buyer.
To maintain confidentiality, consider having a family member, attorney, accountant, or other trusted third-party run the ads for you as your "ad manager". This way the business cannot be traced back to you by the ad's contact name, email, or phone number.
Some businesses could be sold to one of their customers, employees, or competitors. With discretion, have your "ad manager" introduce the opportunity by emailing the ad to these prospects. The ad will serve as a filter, uncovering potential buyers while maintaining confidentiality.
STEP 3 - QUALIFY YOUR BUYERS
Require your buyers to sign a Non-Disclosure Agreement (NDA) prior to releasing the identity of the business. Get to know the buyer. Uncover how they intend to pay for the business, and their level of experience. If they intend to get financing, then expect the sale to take 4 to 12 weeks longer. Trust your gut. If what the buyer is saying sounds a little off, it probably is.
Consider preparing a memorandum, or short document introducing the main characteristics of the business. This should include a one-page snapshot of the financials. Send this information to any buyers that meet your criteria.
STEP 4 - INTRODUCE THE BUSINESS
If you're feeling good about the buyer and they are still interested in the business, feel free to arrange an after-hours tour of the physical location, or arrange an introductory phone call if a physical tour wouldn't apply. This is where you and the buyer can ask each other questions and explore a possible fit.
STEP 5 - CONFIRM INTENT TO BUY
After a tour or call, but BEFORE releasing more information to the buyer, you should require the buyer to prepare a written "contingent offer" or "letter of intent". This way, you know what the buyer intends to pay for the business. Too often, a seller proceeds for months of due diligence only to receive a low-ball offer at the end!
Have your attorney review the offer before accepting it. It's also wise to have your attorney escrow an earnest deposit from the buyer. This helps to deepen your buyer's commitment and further supports their ability to buy.
STEP 6 - CONDUCT DUE DILIGENCE
Now is the time to release detailed financials and other records, and to count inventory and other assets. Your buyer should also be working out their lending if needed. Expect the offer to change after the buyer conducts their full investigation. For example, the original offer may have assumed a certain inventory level, but after counting the inventory, you discover far more. In this case, the purchase price should be increased accordingly.
When both you and the seller are satisfied with the investigation, the buyer should escrow their remaining down payment, and both parties should sign an agreement to proceed to the closing event.
STEP 7 - CLOSE THE SALE
Closing documents should be prepared by an attorney and provided to both parties prior to the closing appointment. Chose a closing location convenient to all parties such as a bank or the attorney's office.
FOR MORE INFORMATION, we invite you to contact us for additional tips. Click here to reach us for a free consultation.
Appraising the value of a service business
Service businesses mainly sell their customers the hard work of their team, not manufactured products. The appraisal or valuation of a service business can vary widely, but similar types of business sell for similar multiples of their sales revenue. The following are a few examples.
(%) x (annual sales revenue) = (rough value).
PERSONALITY-BASED SERVICES (25% - 35%)
Hair and nail salons, real estate agencies, construction trades, and travel agencies fetch some of the lowest valuations largely because their customers choose them based on a relationship with the business owner. If the owner tries to sell the business, only part of the customers will transfer to the new owner.
HOME MAINTENANCE SERVICES (25% - 60%)
Appliance repair, handyman, garage doors, HVAC, plumbing, collect 25% to 40%. Carpet and window cleaning, general maid services, landscaping and holiday lighting, get the next tier up at 40% to 60%.
AUTO CARE AND MAINTENANCE (30% - 50%)
Auto shops specializing in brakes, transmissions, mufflers, and general repair are worth about 30% to 40% of sales. Auto detailing, lube, and glass are worth more, in the 40% to 50% range.
TRANSPORTATION AND RENTAL SERVICES (35% - 50%)
Transportation services including taxi and limo, bus chartering, ambulance services, and auto and trailer rentals.
SALES AND MARKETING (40% - 60%)
Firms in advertising, marketing consulting, website development, SEO and social media, get about half of their annual sales in value. The more residual, the better the value.
MEDICAL PRACTICES (40% - 70%)
General medical practices are on the lower side of the scale, with specialist towards the middle. Dentists, optometrists, chiropractors, and physical therapy enjoy the highest valuations. As if you needed another reason to envy your dentist, he's building a practice worth around 60% to 70% of sales!
FINANCIAL SERVICES (75% - 150%)
Want to grow a business with tons of value? Go to the money industry. These are insurance and investments, bookkeeping and accounting, check cashing and alternative lending. Payroll services and investment advisory services command the highest value rates.
Need more information for appraising your business? Contact us for a FREE approximation of value.
NOTE - Value ranges shown are based on our own research across thousands of actual recorded business sales. The value of your business may be different from what's shown here. This post should not be considers financial or legal advise of any kind, nor a statement of value for your particular business.
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Recognizing value in a business
Here's a simple guide to understanding the assets of a business:
INVENTORY is the stuff the business sells to it's customers. A gas station mini-mart sells candy bars and soft drinks. This is the inventory.
FURNITURE, FIXTURES & EQUIPMENT (or "FF&E") help the business do it's work. This the shelving and refrigerators at the mini-mart that hold the candy bars and drinks. The buyer of the business should value this at it's current "as is" street value.
REAL ESTATE is the building and land used for operating the business. If real estate is included in the sale, be sure to get separate appraisals for the real estate and the business to know the combined true value (Contact us for FREE appraisal info.)
LEASES can add to the value of a business if they have good terms. Bad leases can diminish value. Some businesses operate on such narrow profit margins that a good lease may be one of the only points of value!
"TENANT IMPROVEMENTS" OR "LEASEHOLD IMPROVEMENTS" are semi-permanent modifications made to the real estate by a business owner who leases the property. At the min-mart, the checkout counter and the tile on the floor are considered improvements to the real estate.
CASH in the register, and in the bank accounts are assets too. But these do not transfer in a sale. They stay with the seller. The buyer of the business should plan on bringing their own operating capital to the business.
ACCOUNTS RECEIVABLE (or "AR") is money owed to the business. Often the seller will keep these accounts because they are sales from the past owner. Similarly, long-term service contracts such as government contracts, can carry weight in a valuation, but these generally transfer to the new owner.
INTANGIBLE ASSETS & INTELLECTUAL PROPERTY (or "IP") are the websites, recipes, documented systems, patents, exclusive vendor contracts, and other proprietary resources. Some buyer will buy a failing business just for a single element of IP.
And saving the best for last...
GOODWILL is the "momentum" of the business. It's the positive reputation, brand recognition, existing advertising, customer lists, repeat business and referrals. You can roughly measure the goodwill of a business by how much in sales revenue the business is generating without effort from the business owner. Goodwill is the main thing most buyers are looking to purchase.
How to get higher purchase offers
The sooner you start preparing for the sale, the more time you'll have to increase the value by implementing the following strategies.
INVEST IN MARKETING THE BUSINESS FOR SALE
Most buyers find the business they want from "for sale" websites. There are more than 100 good sites out there! The more exposure you get, the more buyers you will attract, and the higher your asking price can be. (Contact us for FREE advice on listing your business on your own.)
OFFER SELLER FINANCING
Yes, you'd prefer to receive all cash at closing, but most buyers prefer to pay part of the purchase in payments. Buyers are even willing to pay more for the added convenience. Why not raise the price and add on a little financing?
KEEP IMPECCABLE BOOKS AND RECORDS
Buyer are impressed by carefully organized financials, customer lists, inventory lists, employee and vendor lists. Get organized. It's a good investment of your time prior to a buyer asking for these records.
NORMALIZE YOUR BOOKS
"Normalizing" is the process of adding back into your bottom-line profitability anything the business owner receives as a direct benefit of owning the business (also called "owners privileged"). For example, if the business pays the owner's truck payment of $400/mo, show the added $4,800 annual figure as added profitability. (Contact us for FREE advice on normalizing books.)
MAKE YOURSELF IRRELEVANT
Build the business run without you. It will make it easier for a new owner to take it over. Transfer your responsibilities to your team members and software automation. Buyers will pay more for the opportunity to chose what tasks they take over in the business.
HIRE A BROKER
I've seen several studies comparing "for sale by owner" transactions with brokered deals. On average, brokers are able to get around 20% more for the sale of a business. (Click here to see our broker services.)
The longer you can wait, the more likely you'll find a buyer willing to pay a premium. Average sales take around 6 months from listing to close. Plan on at least that amount of time to maximize your sale.
How to count inventory the right way
For businesses that sell products, it's important to count the inventory before and after the sale of the business. But the counting process only needs to be as detailed as the buyer requires. We'll share three ways to count, pick which is best for you:
OPTION 1 - THE QUICK COUNT
Some buyers are fast decision makers. They walk into a business, scan the room with their eyes and exclaim, "I'll take it!" This buyer should consider a "quick count". Take detailed pictures of the inventory, and write up the closing documents referencing the pictures. This option can work well for high-trust fast-paced sales. But take caution. Buyers and sellers take on a higher risk than the other options. A seller could sneak out a significant amount of inventory, or simply not replenish it as it gets sold. Or after the sale, a buyer may claim there is missing inventory, when the inventory has simply turned from customer sales.
OPTION 2 - THE ESTIMATED COUNT
This option is more common than the first. The seller, buyer, and broker will meet onsite after hours and count the inventory together. They will number the shelves, take pictures, and then estimate the contents. The inventory note would read "Display rack #5, contains 54 types of candy, approximately 350 individual units". While together, all three parties agree to the numbers described.
In some cases you may even estimate a value for the line item. The value of inventory is based on the wholesale cost to purchase it (not the retail price), and the chance of it getting sold. Unsalable inventory isn't worth much.
OPTION 3 - THE DETAILED COUNT
Sometimes a buyer wants to document every item, one by one. The buyer and seller will generally pay for an impartial third-party company to do the count, documenting the items in detail, such as "Shelf #32, 11 king-size snickers bars". If after the count, the deal falls through, the seller should be able to recoup her cost from the earnest deposit held in escrow. (Contact us for more info on Inventory Count Best Practices)
Your guide to business sales professionals
Several types of professionals can assist you in the sale of a business. Understanding what they do well (and poorly) will help you assemble the right team.
BUSINESS BROKERS specialize in the sale of "profitable" businesses. Good ones are experts at finding buyers and closing the deal. They are paid a percent of the sale when the business changes hands. If your business is small or isn't performing well, you may have challenges getting good service from a broker. (Instead, consider a consulting service and sell it yourself.)
REAL ESTATE AGENTS who specialize in the sale of commercial properties can be very helpful if your business is real estate centered, such as office buildings, car washes, and hotels. Their fees are usually less than a business broker's. But beware. Most agents will list a business publicly, which may damage the business by scaring away customers and employees.
ACCOUNTANTS & ATTORNEYS play essential roles in business sales. A good accountant can help prepare your books, and a qualified attorney should assist in closing the deal. They may be all you need if you already have your buyer. If you still need a buyer, consider handling that yourself or hiring a broker or an agent.
FRANCHISORS & NICHE BROKERS Most franchisors have a "resell" side to their company that simplifies selling your franchise to other franchisees. Similarly, there are firms that specialize in selling similar businesses such as dental practices or auto repair shops. Either way, we recommend you explore finding your own buyer to get a higher sale price.
SECURITIES BROKERS can be the right choice if your goal is to sell stock or shares of your business, rather than the whole thing. Seek out a specialist with the proper licensing who can reference several other successful transactions.
BUSINESS CONSULTANTS can be helpful along the way, especially if they have experience selling a business. They may know a good broker, attorney, or even an interested buyer. It's wise to trust them only in theirs areas of expertise. Get a free consultation with a broker, and compare it with your consultant's ideas.
Why seller financing is ALWAYS good
It's almost always a good idea for a business seller to give a portion of "seller financing" to the buyer of his business.
WHAT IS "SELLER FINANCING"
When a business seller accepts payments for a portion of the business sale, the seller is extending "seller financing" to the buyer, also called a seller's "note" or "carry back". The seller is literally extending a loan to the buyer. (Click here to contact us for FREE help structuring your seller financing.)
Here's why most small business sales should have a portion of seller financing:
ATTRACTS MORE BUYERS
In our experience, businesses that advertise seller financing get 10% to 30% more buyers responding to the ads. The more responses to the ads, the more buyers you find, and the greater the chance of finding the very best buyer. (Take a look. Most of our buyers carry a portion of seller financing.)
HELPS BUYERS QUALIFY FOR THE PURCHASE
Most buyers will assemble their cash for the purchase in financing blocks, pulling cash from several places. If they can count on a portion of their financing coming from the seller, they are closer to qualifying. In some cases banks are more likely to lend on a deal with seller financing.
SHOWS FAITH IN THE BUSINESS
No matter how well a buyer examines a business before she buys it, there's always unknowns. If part of the purchase is seller financed, the buyer can have greater faith in the purchase, because the seller has an incentive to see the buyer succeed owning the business.
LESS RISK FOR THE BUYER
Sometimes during ownership transitions, financial loose ends don't quite get fully wrapped up. Owed sales taxes, insurance claims, or forgotten debts may still remain with the business. If the buyer is left holding the bag, then these liabilities can be paid by the buyer and discounted from the seller financing note, known as "right of offset".
PROVIDES FOR BETTER NEGOTIATIONS
Without seller financing, most times the only item to negotiate on is the purchase price. With seller financing, there are many more ways to strike a deal. The amount of the note, interest rate and terms, and payment terms, all become negotiable items, adding color to the sale.
SELL FOR A HIGHER PRICE
A banker will tell you--Extending loans can be very profitable. Sellers who carry a note are not only selling a business, but selling a loan. It's one of the fastest ways to increasing the value of a business!
Often buyers have enough for a down payment on the business purchase, anticipating they will get a bank loan for the rest. But bank loans can often take months to finalize. If the seller becomes the bank, the deal can be done in a week! If you need to sell fast, offer seller financing.