Your business value depends on many factors covered elsewhere in this blog and on our site. Most of them you must build over time, and sometimes your business does feel like a grueling push of a boulder up an endless hill. You can afford to make some mistakes and let the boulder slip sometimes, but the one time you cannot allow this to happen is …
when you have decided to sell the business.
The saying is that “business purchasers buy for potential but pay for actuals”. So your actuals must be as solid as possible when offering the business for sale, and they must remain solid for the 3-6 months (more for a larger business) that the transaction is in play.
Buyers have to be able to envision that they can take over your business and continue to bring in the same revenue just by doing nothing. They should have some ideas as to how they will do even better, because the business loan creates an added debt service cost that you did not have to bear. As long as your due diligence period goes uneventfully, and as long as the business days the observe don’t dissolve into regular meltdowns, they’ll be partially distracted by planning the marketing activities they want to start doing or an adjustment to the product offerings they’ll want to roll out.
The one thing you don’t want to happen is for the business situation to deteriorate while you are in the sales process. The buyer’s daydream bubble pops.
A buyer with limited experience in your industry is forced to confront the possibility that if this can happen to you, who have years of experience in this business, it can happen to them too. Suddenly they will be looking for loopholes in the sales contract that allow them to walk away from what now looks like a potential money pit.
Buyers with more experience may be able to see where you have gone wrong and how the situation can be remedied, but they will also suggest that your earlier 12-month track record may have been window-dressing. They will demand that you adjust the selling price to conform to the new revenues and net. You’ll be over a barrel, trying with one hand to deal with whatever forest fires your business is throwing at you while trying to salvage what looks like a dying sales deal for the business on the other. It will be very hard to recognize that it is just business; you’ll feel personally attacked by the buyer’s suggestions of misrepresentation. As a minimum, you’ll be taking on a lot of additional stress at a point where you have plenty of that already.
How do you deal with this?
Insist on Discretion: Insist on total silence on this deal until you feel the time is right to communicate the change to your staff. As a minimum, this must be after due diligence is completed and contingencies are cleared. Once the word gets out, some staff members will get nervous and want to quit even though replacing them is the last thing the new owner wants. Certainly, you will lose customers who will start making backup plans for alternative suppliers.
- Delegate: Make your business self-operating through staff training and solid processes. That will free you up when needed to deal with prospective buyers without putting a crimp in your operations. More importantly, it will allow the buyer to see that the whole business can continue to operate after the transition without everyone depending on the buyer to be told what to do day-to-day.
- Compartmentalize: Keep your head in the business by letting a broker handle as much as possible of the business-selling activity. It will help you with confidentiality and keep the purchasers out of your hair while you’re focused on running the business.
- Be realistic: The value of the business is as the market sees it in the here and now. It’s not an assessment of your years of effort. That way you won’t be fretting over unsatisfying offers instead of keeping the business in peak condition for a few more weeks. Unfortunately, the odds are not with you in this game. If it’s a fair deal, take it; the handsome prince isn’t coming. Don’t be the owner who walks away with nothing because a fair deal wasn’t good enough.
- Cooperate: Make it clear that you and the buyer are in this together to make their business successful. Once the terms are set and the contingencies removed, so that the contract must proceed to completion, introduce the buyer to key suppliers and customers. Help them maintain that vision in their minds of them taking this business over (and making it even better) in just a few weeks, which will soon turn into days. If there is any kind of financing, you will in fact depend on their success if you expect to get any of the note payments; the last thing you want is to have to repossess the business, now failing, in a year or two.
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