5 Cardinal Rules Selling a Business

Essential elements to successfully selling a Business

“5 Cardinal Rules”

In the past 30+ years I have assisted hundreds of small business owners successfully sell their businesses, with over 97% of the buyers continuing the business successfully 5 years after closing and zero litigation.  In addition to this direct experience, I have had the opportunity to observe countless unsuccessful and often disastrous transactions, whether through ex-partner brokers or prospective clients contacting me for assistance to try and clean up the mess.

I have learned and share with every client the 5 essential things to keep in mind when selling their business, which I have learned will greatly increase the likelihood of a successful profitable win-win transaction and minimize the risk and hassles associated with a deal gone bad.

Number 1 – Never sell your business to someone you do not LIKE.

This is first and foremost for a number of reasons. Step back for a minute and consider “the business” without the emotional ownership attachment. What we see is a collection of stuff; desks, chairs, computers, fixtures, machines, tools, forklifts, trucks…….. just a bunch of stuff. Anywhere in the country, on any given weekend, you can find an auction or liquidation outfit selling this stuff. Understand that the buyer perceives this as used stuff and places value on this far below its actual in place value. They believe they can simply go to the auction and buy the same used stuff for pennies on the dollar. We then have to add inventories to the mix. Understand the buyer is being told and believes there is likely a huge obsolescence factor in the inventory, and they could simply setup a wholesale account and acquire nice shiny new inventory. Next, they imagine replicating our employees is as easy as an ad or two placed online and they can hire all the folks they need. Then we need a building. Frankly it’s just a facility; an alternative can be built, leased or purchased, relatively easily, at least in the mind of a potential buyer. So we have the “stuff”, order the inventory, hire staff and move in to a facility, have I duplicated the business?

NO – a business is in many ways a living creature, how customers are treated, how employees are dealt with, all of its operations, procedures and practices, in short everything that makes it an going concern, has the owners personality all over it. Human nature is that we like individuals who are similar to ourselves and dislike those who are not. If you like the buyer chances are good that your customers and employees will also be comfortable with them, the operations will be easier for them to adjust to. There will be far less likelihood of dramatic changes, capable of upsetting the business. Keep in mind folks usually resist change and an ownership change can be a very traumatic occurrence.

On a personal note, it is far easier to work with people you like, rather than those you don’t and remember there will likely be a good amount of time you will need to spend working with the buyer after closing. Life is too short to be involved with folks you do not like.

Number 2 – Never sell your business to someone you do not TRUST.

What does your gut tell you about this buyer? Does their reason for wanting to acquire the business ring true? Does the buyer fully understand what they are getting into; do they have the skills and intellect necessary? Do you trust that they have thought this through and understand just how hard small business ownership is? Be certain the buyer has realistic expectations. Trust that they have the support of their significant other and are in a position in their personal life to put in the 24 hours a day 7 days a week effort that business ownership requires. This is a major lifestyle change for most buyers and requires clear realistic expectations to succeed. Caution; folks who believe they will now somehow be free from employer demands and/or will double or triple earnings in a few short years, are not a good bet. These are unrealistic expectations and when not met, the buyer will be looking for some (someone other than themselves) to blame. It is my opinion that the “business ownership gene” is present in about 15-20% of folks, 80-85% have no business being in business. Trust you are dealing with a realistic party capable of accepting the responsibility for the future success of the business.

Number 3 – Never sell your business to a buyer who doesn’t invest REAL MONEY.

Be certain the buyer is investing real money; this is money the buyer has earned, saved, and paid taxes on. They know the value of those dollars. Real money is not daddy’s money, the banks money, or lottery winnings, it is not money easily come by or inherited. That’s easy money to lose. While it is true there are fewer buyers with the substantial cash to invest you are always ahead of the game when working with those that have the cash, they have proven, by putting this investment capital together, that they are fiscally responsible, financially conservative and reasonable intelligent or they would not be in a position to write the big check.

I know you prefer not to hear the truth, but reality is that you will likely have a financial interest in the transaction and in all probability will be assisting in financing the acquisition. I know you don’t want to hear this, but consider what you have said to a buyer when you tell them you do not believe the business has any value as collateral, nor will be capable of repaying any debt. They will hear you and this will substantially devalue your business. Be careful, not to think real estate or other financing deals, this is not that type of transaction. Usually the owner carry in a successful business sale is in the range of 40-50% of the total deal, not less than 50% real cash investment from the buyer in my opinion.  Be aware price and terms are inversely related – the greater terms you offer the better price you will get, with increased risk of course, likewise insisting on all cash will carry a substantial discount from market value. Make sure the buyer is heavily invested in your business, with real money. A buyer who is heavily invested will do what is necessary to protect their investment, as well as, your interests.

Number 4 – Never try to sell POTENTIAL

Be smart; understand that trying to sell the buyer on paying you for their efforts after they buy the business is not getting you anywhere. Yes, we want to create opportunities in the mind of the buyer but a smart buyer is not going to pay you for the future. We have no control what the future holds, we simply do not know. The economy, world events and countless factors out of our control could wreak havoc on the small business world.

Feel free to discuss what you would do if you had the energy or desire, but never be quantitative nor make definitive statements about what might be in the future. Imagine yourself on the witness stand after the buyer has sued you for misrepresentation; “yes your honor I did tell the buyer if he just did x, y, and z the company would double”. You are in trouble and the attorneys are the only ones that win.

You can only sell what you have and what you know. Represent only historical fact. Allow a professional to show the buyer what opportunities are available, the size of the market, similar success stories in such a way that the buyer internalizes their beliefs of what the upside is to moving forward with your business.

Number 5 – This is NOT a “used car” sale do not treat it as such. 

Successful  transactions are done “at will” by business people who want to work together in a true win-win fashion  A business is not just a thing, it’s closer to a living creature, unlike anything else you’ve sold before. When selling a business you are conveying large amounts of hard earned knowledge you now have to the buyer, a great rapport and mutual respect is required.

Understand the fair market value of your business,  price it fairly, establish that the buyer can see a reasonable salary, reasonable  return on investment (ROI), service any debt and leave a residual for growth or those just in case items. Set a reasonable price/terms and stick to it. Do not add 20% just to give you room to negotiate, this is counterproductive. Just as in a “used car” deal in the end both sides end up with a bad taste in their mouths, that ‘I could’ve got more or could have paid less” sentiment.  This will permeate the relationship during transition period and likely make working together much less positive.

Do not engage a buyer who is not realistic in his expectations, agree to disagree and move on. There are plenty of quality buyers out there, it’s  just a matter of time to find the right one.

I have come to realize over the years the keys to a successful sale of the business are; the parities like and trust each another, both have skin in the game and a mutual objective the successful future for the business, have based their decisions on current and historical facts not theoretical expectations, and dealt in good faith avoiding nasty negotiations prior to the sale.