Selling a Business: How Long Does It Take?
A recent survey revealed the following about the length of time that selling a business requires:
Average time from putting the business on the market to time of sale:
Time Period % of Businesses Sold in This Time Period
1 to 3 Months 9.7 %
4 to 6 Months 28.3%
7 to 9 Months 38.0%
10 to 12 Months 15.9%
13 to 18 Months 7.6%
19 + Months 0.7%
It took from four to 12 months to sell approximately 82 percent of businesses, with 38 percent falling into the seven- to nine-month range. Certainly some businesses sell more quickly, but at the other end of the spectrum, over eight percent are on the market for over 12 months.
Why does it take so long to sell a business?
Price and terms are the biggest reasons. Not over-pricing the business at the beginning of the sales process is a big plus, as well as a transaction structured to include a reasonable down payment with the seller carrying the balance. Having all of the necessary information right from the beginning can also greatly reduce the time period. Being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is the key.
Here is the basic information that a prospective acquirer will want to review:
Copies of the financials for the past three years.
A copy of the lease and any assignments of the lease from previous sales.
A list of the fixtures and equipment that will be included in the sale. Note: If something is not included, it is best to remove it prior to the sale or at least have a list of items not included.
A copy of the franchise agreement if applicable or any agreements with suppliers or vendors.
Copies of any other documentation pertaining to the business.
Supporting documents for patents, copyrights, trademarks, etc.
Sales brochures, press releases, advertisements, menus or other sales materials.
In addition, here are some of the questions that buyers may have. A prepared seller should have ready answers as well as the information to support them.
Is the seller willing to train a new owner at no charge?
Are there any zoning or local restrictions that would impact the business?
Is there any pending litigation?
Are any license issues involved?
Are there any federal or state requirements, or environmental OSHA issues that could affect the business?
What about the employee situation? Are there key employees?
Are there any copyrights, secret recipes, mailing lists, etc?
What about major suppliers or vendors?
A prepared seller is a willing seller, and having the answers to the above questions can significantly reduce the time it takes to sell a business. Using the services of a professional business broker can also greatly reduce the time period. They are knowledgeable about the current market, how to market a business and they can advise a seller on price and terms. They can also recommend professional advisors, if a seller doesn’t have them already. Using advisors who are transaction-experienced can also shorten the time it takes to close the sale.
Why Seller Financing?
Many business owners would like to receive all-cash for their business when selling. And yet they are often told that this is really not possible. Why? Most people are accustomed to financing just about everything - home, car, vacation home, even college for their children. The first question business brokers are often asked is, "How much money will I have to invest to buy that business?"
Seller financing is usually necessary because of the lack of outside financing available. Certainly, some is available, but less than 90 percent of small business sales receive outside financing when selling. If you are selling, you may be one of the few lucky ones, but the business better be absolutely perfect.
If a seller is not willing to finance the sale, many buyers suspect a problem. After all, a business should be able to pay for itself and provide a reasonable income for a buyer. A buyer then wants to know what is wrong with the business that the seller wants all cash?
Aside from this, even if a buyer has all of the necessary funds, he or she may want to spend their money on improving the business, adding equipment, building inventory, or just keep it for working capital.
Another similar issue that is raised by sellers is that, if they are willing to finance the sale, they want some outside collateral to secure the loan on their business. They want to make sure that they get all of their money - with no risk. Buyers are very sensitive about this issue. Again, they raise the point about the business being able to pay for itself. They may feel that the seller wants additional security because of concerns about the business's ability to generate a reasonable profit. This is not a reassuring signal to the buyer. Most buyers are already using most of their capital for the down payment, and they generally are very reluctant about using their home or retirement funds for additional collateral.
The services of a business broker professional can usually provide guidance in the overall financing process. And financing is often the key to the successful selling of a business.
What Do Buyers Really Want to Know?
Before answering the question, it makes sense to first ask why people want to be in business for themselves. What are their motives? There have been many surveys addressing this question. The words may be different, but the idea behind them and the order in which they are listed are almost always the same.
Want to do their own thing; to control their own destiny, so to speak.
Do not want to work for anyone else.
Want to make better use of their skills and abilities.
Want to make money.
These surveys indicate that by far the biggest reason people want to be in business for themselves is to be their own boss. The first three reasons listed revolve around this theme. Some may be frustrated in their current job or position. Others may not like their current boss or employer, while still others feel that their abilities are not being used properly or sufficiently.
The important item to note is that money is reason number four. Although making money is certainly important and necessary, it is not the primary issue. Once a person decides to go into business for himself or herself, he or she has to explore the options. Starting a business is certainly one option, but it is an option fraught with risk. Buying an existing business is the method most people prefer. Purchasing a known entity reduces the risks substantially.
There are some key questions buyers want, or should want, answers to, once the decision to purchase an existing business has been made. Below are the primary ones; although a prospective buyer may not want answers to all of them, the seller should be prepared to respond to each one.
How much is the down payment?
Will the seller finance the sale of the business?
It can be difficult to finance the sale of a business; therefore, if the seller isn't willing, he or she must find a buyer who is prepared to pay all cash. This is very difficult to do.
Why is the seller selling?
This is a very important question. Buyers want assurance that the reason is legitimate and not because of the business itself.
Will the owner stay and train or work with a new owner? Many people buy a franchise because of the assistance offered. A seller who is willing, at no cost, to stay and to help with the transition is a big plus.
How much income can a new owner expect?
This may not be the main criterion, but it is obviously an important issue. A new owner has to be able to pay the bills - both business-wise and personally. And just as important as the income is the seller's ability to substantiate it with financial statements or tax returns.
What makes the business different, unique or special?
Most buyers want to take pride in the business they purchase.
How can the business grow?
New owners are full of enthusiasm and want to increase the business. Some buyers are willing to buy a business that is currently only marginal if they feel there is a real opportunity for growth.
What doesn't the buyer know?
Buyers, and sellers too, don't like surprises. They want to know the good - and the bad - out front. Buyers understand, or should understand, that there is no such thing as a perfect business.
Years ago, it could be said that prospective buyers of businesses had only four questions:
Where is the business?
How much is it?
How much can I make?
Why is it for sale?
In addition to asking basic questions, today's buyer wants to know much more before investing in his or her own business. Sellers have to able to answer not only the four basic questions, but also be able to address the wider range of questions outlined above.
Despite all of the questions and answers, what most buyers really want is an opportunity to achieve the Great American Dream - owning one's own business!
What is a Contingency?
A contingency in the sale of a business is a condition in the contract of sale or offer that must be resolved, satisfied or rectified by either a buyer or seller. If they are not satisfied then the sale will generally not go forward. Most offers on a business contain one or more contingencies. The sale may be subject to the buyer obtaining financing, or the seller repaving the parking lot. Experienced business brokers have seen just about every contingency there is. Most of these are placed in the offer by a buyer who has concerns about one or more issue and needs it or them to be satisfied before proceeding with or closing the sale.
It may be as simple as the sale is contingent upon the buyer receiving a five-year extension of the lease by [a certain date]. Or, the offer to purchase may state that the sale is conditional upon the buyer's approval of the seller's books and records.
The difference between the two examples is that in the first one, it is a specific event that must be satisfied, and a time limit is specified. The second example is open-ended, meaning that a buyer could opt out of the deal by disapproving the books and records essentially for any reason.
Here are some tips on contingencies:
There should be a time period in which the contingency must be satisfied. Without it the deal could go on almost forever.
It, or they, as the case may be, should be reasonable. There is no point in making the sale contingent on moving the building to the next state. As they say - "it ain't going to happen."
Contingencies should be limited to very important or critical issues - those that impact whether a buyer will actually purchase the business or not. Minor items should be resolved prior to an offer being written.
Confidentiality or proprietary issues may influence whether a buyer will buy the business, but the seller is not willing to proceed until an offer containing price and terms is agreed upon.
Contingencies come in all sizes and shapes. Very few offers don't contain at least one, and usually more than one. They are an inevitable part of selling - and buying a business. A business broker knows what is reasonable and what is not.
Price and Value: Any Difference?
The question most often asked by those considering placing their businesses for sale is: “What is my business worth?” The question that should be asked is: “How much can I get for my business?” Worth and value are words that in many cases are interchangeable. Leading business appraiser Shannon Pratt, in his book Business Valuation Body of Knowledge, states that “Price is the face value at which a specific transaction occurred. It may have been arrived at arbitrarily, by negotiation, by contract, by court order, or by some other means. It may or may not comport to any definition of value discussed herein.”
“Fair Market Value” is a term that sounds tailor-made for a business owner who wants to know what his or her business might sell for. The U.S.Treasury Department offers this definition of Fair Market Value: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This might work in theory, but not in the real world. The word “negotiation” is not used, so arriving at this Fair Market Value is assumed to just happen. The sale of a business simply doesn’t work that way.
The price that a business may sell for is generally far removed from its value. Value tends to be an exact price for a specific date and must be able to be defended by the appraiser. There are many different types of value, based on the purpose of the valuation and/or the reason behind the decision to sell: divorce, insurance purposes, bank loan, partnership issues, buy-sell agreements, tax concerns, retirement – the list is lengthy. In many cases, each reason may result in a different valuation.
When a seller asks what he or she might receive for their business, there is no right answer. It depends, for one thing, how badly the seller wants to sell. Regardless of who places a price on the business, it will be the marketplace that ultimately determines the price. The seller may not agree with this, but he or she will have to accept it or face the fact that the business most likely will not sell, regardless of asking price or perceived value. It all boils down to a buyer’s perceived value of the business.
Professional business brokers know the marketplace, what businesses are selling for, what buyers are really looking for, why they may be buying, and most importantly how to deal with perception of value.
You Want How Much for Your Business?
This is often a prospective buyer’s first response when given the price of a seller’s business. This is especially true today when many excellent and profitable businesses have few hard or physical assets. For years, buyers, and even business appraisers, have called the difference between the actual physical assets and the asking price as “blue sky.” Goodwill has often been a prime force behind the blue sky concept, and it is one of the reasons a potential buyer might feel that the seller is asking an “arm and a leg” for the business. Goodwill has been called many things – very few of them good.
However, today’s goodwill is more than just the hard work and effort a business owner has put into building the business. The Web site name alone may be worth a lot of money. Think “Google,” which by now may have achieved the same name recognition as Kleenex. If another search engine company could use that name, the business could be worth millions – even billions. The technology behind the name has a lot of value, but it’s important to remember that the name recognition or brand name, which is known all over the world, is also where the big bucks lie.
How does this relate to goodwill? The goodwill of a business can include patents, copyrights, its Web site and/or domain name, licenses, trademarks, proprietary software, secret recipes (What is the value of the secret recipe for Coke?), royalties – the list goes on and on. Would a McDonald’s business, assuming the same sales and profit, have the same value if the name and franchise were not included.
Buyers are beginning to realize that much of the value of a business in today’s world is not to be found in the hard assets such as the fixtures and equipment, but in the intangibles that create the income. Take the McDonald’s just mentioned, it may have beautiful stainless steel equipment, but the equipment is only worth the income it can produce; and to take it a step further, there are warehouses in every major city in the country full of “for sale” stainless steel equipment. The real value is the name and what it represents to the dining public.
For those who are considering selling their business in the near future, this new emphasis on goodwill means that some business procedures need to be changed. Operations manuals should be copyrighted, Web sites and domain names should be protected, product and specific service names should be trademarked, inventions patented. There needs to be emphasis placed on intangibles that have to be earned, such as name recognition, brand names, employees, business relationships with suppliers and customers, long-term advertising, reputation, etc. Don’t let anyone tell you that goodwill doesn’t have value – it is most likely the most valuable asset of your business.
Goodwill should be as protected as the law will allow. A visit to an Intellectual Property attorney may well be the best investment a seller can make.
For those who are considering buying a business, make no mistake about it, in many cases, what you are really buying is the goodwill of the business. If a buyer is still hung up on buying the stainless steel equipment, we have a warehouse full of it for sale!