The Ins and Outs of Selling Your Business

All those business owners who waited out the Great Recession before selling their companies can heave a big sigh of relief.

The recovering economy has generated a slew of would-be buyers looking for growth opportunities in attractive independent businesses. According to new research, the next two years will be a great window for owners of various enterprises, from construction companies to carpet-cleaning businesses, to consider cashing in on improving sales and business momentum. A recent Wells Fargo/Gallup Small Business Index finds that about a third of small-business owners predicted the best time to sell would be through early 2017. Many business brokers agree.

“The stock market has come roaring back, home values are up, and financing is loosening,” says Bob House, general manager for BizBuySell.com, the largest online marketplace for small-business transactions. “We’ve seen a lot more buyers come off the sidelines.”

San Francisco-based BizBuySell saw transactions reported by brokers using its platform increase nearly 50 percent last year, compared to 2012, led by growth in the restaurant and retail sectors. Before that, sales of small businesses had fallen off sharply until mid-2009 and staggered along without any meaningful improvement for several years.

Todd Paul, an Evanston, Ill.-based investor in small companies, says many of the businesses he is seeing come on the market are in better financial shape now than before the economic downturn; that’s mainly because when owners couldn’t cash out, they improved their companies by cutting unnecessary costs, enhancing operations and boosting sales. “Those people have built their businesses up, and they’re coming back into the market,” says Paul, who has studied food manufacturers, local publishers, and even oil and gas pipeline manufacturers.

Selling on Your Own

In August 2013, Champaign, Ill., tech entrepreneur David Mizer sold a primary component of LookAtUsedCars.com—which he started in 1999—nearly completely on his own. The sale was fairly easy, he says, because the buyer was a large car dealership group headquartered in Utah that was already a primary user of Mizer’s technology, which facilitates vehicle sales between dealers.

The two parties had toyed with the idea of a sale before, but the dealer finally made an offer last year. Mizer sold for around $500,000, negotiating a deal that also allowed him to keep the rights to his computer code so he could develop the technology for other industries.

Our company “had a heavy focus on this client,” says Mizer, who continued to provide tech support for his former customer until April. “It reached a point where it was time to have a conversation” with the client about purchasing the product.

Many small companies are sold in a similar fashion—to buyers already familiar with what they’re purchasing, perhaps longstanding customers, suppliers, competitors, or an owner’s partner, child or employee.

For countless others, however, a sale or succession doesn’t happen quite so serendipitously. While some sellers rely on do-it-yourself resources such as the Small Business Administration’s website (sba.gov/content/selling-your-business), many turn to outside help to promote their businesses and guarantee fair prices. Often that means using business brokers.

Why Use a Broker?

With access to comparable sales by industry and region, brokers can help determine a business’s value, advise on cost-effective actions to make the business more attractive in the marketplace, and put together a comprehensive offering package with details such as historical sales and projections, says Roger Murphy, CEO of Clearwater, Fla.-based Murphy Business & Financial Corp., which bills itself as one of North America’s largest business brokerages.

Most important, he notes, a broker can tap a wealth of networks and connections to find potential buyers and help qualify them. For instance, brokers handle more than 90 percent of the businesses marketed on BizBuySell; it’s one of many outlets that brokers rely on to gain visibility for sellers. “We [brokers] also have our own websites with our own inventory” and other marketing channels, Murphy says.

Turning over the niggling details to a broker also enables owners to remain focused on the business for the duration of the selling process, which can take months, even a year or more, to complete. Brokers also provide an important reality check, reining in unrealistic expectations about price. “Eight of 10 small-business owners think their business is worth more than it is,” Murphy says. “They value their business based on how hard they worked and how much they invested in it.”

Not unlike the preparations to sell a home, he advises business owners to spruce things up before putting their companies on the market. That means cleaning up books and records, unloading obsolete inventory, and straightening out problematic customer accounts or vendor relationships. Brick-and-mortar establishments such as retail shops should consider fresh paint, new carpet and updated operating systems, if necessary.

West Palm Beach, Fla.-based Monika Stefaniak joined the ranks of broker-represented sellers last year, cashing out of the pet-care business she started a decade ago with virtually no capital and notched $550,000 in sales and more than $140,000 in annual profit. She supervised more than 60 contractors in three counties.

Wanting just the right buyer for DogsGoWalking.com, Stefaniak worried that whoever took over would sustain the level of 24/7 service her customers depended on for their dogs and cats. The whole process took about a year. “I cared about what was happening with the clients and the contractors after I’m not here,” says Stefaniak, whose primary motivations to sell were to simplify her life and focus on another business she started.

She found a local broker who assisted her with everything from reviewing her financials to advertising the business. “I was open and honest about the good parts and the bad—that’s what made it easier [to market],” she says.

After turning down interest from several candidates she thought unsuitable, Stefaniak decided on a buyer, closing on an all-cash deal for $150,000, roughly matching her annual earnings, in October 2013. The broker’s commission was 15 percent. “I know that it was a low price, but I really had to gain my life back,” says Stefaniak, who spent several days with the buyer, teaching her the ropes.

Because sellers typically work closely with brokers for extended periods during what can be a challenging process, good personal chemistry is essential, says Jessica Fialkovich, a Denver-based business broker herself and the former co-owner of a Naples, Fla., wine store. From that store’s sale, she experienced firsthand the “very emotional process. You need somebody who can hold your hand. It’s kind of like letting go of a child. You have to be 100 percent sure that you’re ready to go forward.”

Fialkovich advises sellers to ask broker candidates a lot of questions about their level of customer service, including how accessible the broker will be for questions and what kind of response times to expect. Once a deal closes, brokers typically take a commission of 5 to 10 percent, sometimes more, depending on the size of the business and other variables. Percentages can be negotiable.

What Buyers Want and Will Pay

Today’s buyers are looking for businesses with an appraised value in line with the sales price, along with growth potential, Fialkovich says. For instance, they might want a well-established clothing store that could add a website to produce a new revenue stream, or a restaurant with a strong brand that could be expanded by adding new sites.

Fialkovich adds that buyers are “not looking just at performance, but the risks they’re taking on.” She has seen companies in the manufacturing, construction and technology industries all fetch handsome prices; so-called turnkey businesses, which have short learning curves for new owners, also do well.

Sometimes, depending on the complexity of the business, sellers may decide to pay for an appraisal before putting their companies on the market. Some lawyers and certified public accountants are schooled in this area, but there are also dedicated business valuation professionals who typically charge $5,000 to $10,000, says Tim Lee, managing director of corporate valuation services for Memphis-based Mercer Capital.

Businesses with annual sales exceeding $10 million are usually valued based on some multiple of an annual cash flow measure known as EBITDA (earnings before interest, taxes, depreciation and amortization). Most mom-and-pop businesses, however, will set a value based on a multiple of annual earnings known as seller’s discretionary income, which looks at profit after items such as the owner’s salary, automobile lease and related expenses are added back in.

Lee advises sellers not to hold back on disclosing these amounts. “A buyer is not going to pay for what he doesn’t see,” says Lee, noting the process of preparing financials for a business sale often runs counter to the thinking of small-business owners. That’s because they are often used to working with their CPAs to reduce their taxable income, which can make their businesses appear less robust—and therefore less attractive to would-be buyers—than they actually are.

Besides a business’s historical performance (buyers want to see at least three years of clean sales and earnings data), appraisers will evaluate the selling price of comparable businesses in the area. They are skilled at uncovering business dysfunction such as internal management or employee issues that need to be remedied before a business can be sold, he says. “You want pretty much everything to be hunky-dory,” says Lee, adding that unresolved problems can result in compromised value.

Valuations for small businesses are running anywhere from three times cash flow (sellers’ discretionary income) to as high as five or six times, he says, depending on factors such as the volume of competition and whether the owner is in a recession-proof industry such as health care services—factors the appraiser will weigh.

The bottom line on Mizer’s sale of LookAtUsedCars.com was slightly below the bottom end of this range because he retained the rights to his computer code and the ability to service other customers with similar technology.

Bill Balderaz was able to command what he says was an “above average” multiple when he sold Webbed Marketing, a digital marketing business started in his kitchen in 2006, to a much larger national agency. After attracting multiple suitors with a healthy balance sheet and penetration in the health care market, he sold to Fathom in August 2011 for more than $1 million. He has stayed on at the company. “We grew rapidly. We never took on any debt,” says Balderaz, whose nondisclosure agreement prohibits him from providing specifics on the deal. “We were profitable and had attractive margins.”

Rohit Arora, the co-founder and CEO of Biz2Credit.com, which matches small businesses with lending options, cautions sellers not to get overly excited about an offer before taking time to prequalify the potential buyer’s creditworthiness. His firm and others will do this for a small fee. In addition to the solvency of the buyers, their goal of obtaining financing is directly tied to the seller’s financials, he says. “If they [sellers] haven’t filed their tax returns on time or they haven’t shown sufficient amount of profit, then buyers will have a very hard time getting access to financing,” Arora says.

The bulk of small-business deals are financed by federally backed Small Business Administration loans, he says, adding that the lending environment has improved in recent months.

Because so many small businesses require the owner’s personal touch, many purchase agreements stipulate that the owner stick around for a period of time—often several weeks to a year—to help smooth over the transition and ensure that the new owner learns the ins and outs.

Planning Ahead

Planning is the key to a smooth sale, says Ed Knox, founder of White Plains, N.Y.-based Yarmouth Venture Group, which advises investors who are looking to invest in small businesses. He tells would-be sellers—particularly boomers looking toward retirement—to plan their exit strategies at least five years ahead.

Knox is a fan of companies that look internally within their own ranks for the next business owner because an insider is already versed in the business’s operations and culture. If someone like that doesn’t exist, Knox suggests owners consider hiring to fill the post and bringing the new manager up to speed. Various means, including networking, turning to industry recruiters or advertising in trade journals, can help find that person. Then once this hire becomes an established insider, “he or she knows the customers, all the skeletons in the closet,” Knox says. “He has already done the diligence,” so the sales process is streamlined.

If there is a staff, he says, it’s important not to spill the beans about a planned change in ownership, which could fuel the rumor mill and lead to an exodus if employees worry about job security.

The biggest hurdle to the insider approach is financing, says Knox, noting that the seller often provides financing to assist an internal buyer.

Whatever the strategy—whether going it alone, selling through a broker or passing the baton to an employee—be sure you’ve thoroughly thought out and fully understand any agreement before signing off. Experts say business owners who take the time to prepare are likely to do well in today’s market.

Selling your business but want to retain its talent? Discover the dangers of losing high-value employees and how to motivate them to stay.

Leave a Reply

Close Menu