Over the past ten years our firm has been involved in many discussions with business owners considering the sale of their businesses. There are a few particular myths that have repeatedly surfaced during these discussions.
“A typical business owner will sell a business only once in his or her life, and as a result typically underestimates how complex the process is. This understanding is crucial to a successful business transfer” says Achim Neumann, President of A Neumann & Associates, a leading New Jersey Business Brokerage firm in Atlantic Highlands.
Myth #1 – I Can Sell My Business Myself
Many owners believe they’re qualified to sell their business without professional assistance based on the skills they’ve acquired running their companies. Many owners are entrepreneurs with solid selling skills, and many function as the key salesperson for their company. However, what many don’t anticipate is that selling a business is nothing like selling a product or service.
“If you’re looking to sell on your own, confidentiality is immediately lost” says Neumann. “If word of a potential sale gets out, there are definite risks. You could lose clients, employees and favorable credit terms with banks— not to mention managing potential landlord questions.”
More importantly, business owners must ask themselves: is there really sufficient time to run a business while compiling marketing materials, advertising, screening many buyers (and tire kickers), and giving tours? On top of all of this, do you have the time and wherewithal to negotiate a comfortable deal—an adversarial process by nature—plus facilitate due diligence?
These are important considerations strewn with nuances, and all are time-consuming requirements that directly impact the selling price of a business.
Myth #2 – I Know What My Business is Worth
When self-evaluating the value of their business some owners want $100,000/year for sweat equity or will base their price on what they personally need for retirement. Others utilize “industry multiples,” most often some nebulous concept of EBITDA. Yet others just pick a number out of the air.
“None of these self-derived values will carry any credibility whatsoever with the buyer” says Neumann, “nor will it help the buyer’s bank to provide acquisition funding at closing.”
A third party appraisal by a national valuation company is the only solution to a solid understanding of a company’s growth potential, not some vague industry average. It’s surprising, but not uncommon how many business owners expect a buyer to pay several million dollars for their business, yet are not prepared to spend a few thousand dollars for a qualified third party opinion.
“A seller will instantly lose all credibility with any buyer by not being able to present a properly prepared package that includes a comprehensive company appraisal” says Neuman.
Myth #3 – Selling a Business is Like Selling a House
Preparing to sell a house takes a couple weeks, and then word of the sale is spread as far and wide as possible. Once a satisfactory offer is received, the keys are turned over and the seller moves on. No confidentiality, no pre-qualification, no detailed marketing package, no transition time, no seller note.
Selling a company, however, is much more complex. A successful business sale requires a great deal of pre-planning, valuation, cash flow recasting, document preparation, buyer evaluation and so forth.
It takes three to five times as much time to sell a business as it takes to sell a house. And even after the business is sold, the seller can be expected to stay on for at least several months helping the new owner to succeed with the business— thereby securing payback on the note extended to the new owner.
“Sound sale strategies will bring the seller the optimum price the market will bear,” says Neumann. “However, for business owners wanting to cut corners there is a price to be paid, particularly in this competitive environment!”
Achim Neumann is president of
A.Neumann & Associates, LLC
an affiliate of BBN, Dallas, Texas, with 450 offices nationwide.
Visit the firm at www.neumannassociates.com
or call 732-872-6777