You may have a great business to sell, but if your selling terms are not reasonable, it may not sell. Or, it may take a lot longer to sell the business and result in you getting a lower price. Keep in mind that no matter how good your business is, a buyer doesn’t have to buy it. A buyer is comparing your business to others on the market, and if any of these terms are not realistic, it may kill a buyer’s interest.
The most common term we think of when we think of being realistic is the price. If the price is too high, it generally means that the cost of financing the purchase will take too much of the cash flow and the buyer won’t get enough income, or return on investment, for the deal to make sense. Keep in mind also that you are competing with other businesses on the market, in your industry, and all businesses. If your price is not in-line with what others are asking for comparable businesses, buyers will buy another business.
Another reason that a high price will kill a deal is that, in most sales, the buyer gets an independent appraisal. They may need one for the lender, or just get one to confirm the price. If it is much lower than the deal price, the buyer may pull out of the deal or demand a lower price.
The best way to find out what your business is likely to sell for is by getting an independent appraisal from an accredited appraiser. Most business brokers can give you an estimate of the selling price using your financials and information on what businesses like yours have sold for. These valuations are based on the financial results of your business — generally weighting heavily on the most recent results. That’s because a buyer is paying based on how your business is doing now and the most recent year’s results are the closest to it. Don’t expect to get paid on the tremendous growth opportunity in your business or the “goodwill” you have from being in business for many years.
Another expectation that can be unrealistic is the proposed financing. In order to get an SBA loan, the business tax returns, with typical add-backs, needs to show enough cash flow to provide an income to the buyer, payoff the loan and have a margin of safety. If the tax returns don’t show this, then you will probably have to provide a seller loan.
It is unrealistic to expect an all-cash buyer. Most buyers are leveraging the money they have for a down payment with a loan to buy a business. The buyer that has enough cash to buy your business is usually looking at a larger business to buy using his cash as a down payment. That’s not to say it never happens, because it does, but the all-cash buyer is a small percentage of the potential buyers.
Keep in mind also that the lower the amount of the down payment a buyer needs to buy your business, the more potential buyers there are for it. An SBA loan typically requires 20% down and a seller loan 40% to 50% down. If the buyer can get an SBA loan, there will be more potential buyers.
If your location is important to the results of the business, then a buyer will need to get a lease for the space. Lenders will not give a loan that is longer than the term of the lease, with buyer options to extend.
A buyer will expect you to sign a non-compete. This will prevent you from operating a competing business that does business with the same customers, or operates in the same market area, for several years – typically 3 to 5 years. The non-compete is also likely to prevent you from hiring away employees.
You need to be realistic about the training and transition you will be willing to give a buyer. How much they need depends on the skills of the buyer, how complicated your business is, and what other people or resources there are for training. If you will be staying on for an extended period, it is reasonable to be paid for the time you put in. But, the rate of pay will usually be lower than what you’ve earned in the past.
When you are putting your business on the market, think about the price, financing, and other terms as if you were the buyer. Would they be acceptable to you? Talk to us about the terms you expect. We will give you our expert opinion on whether your expectations are reasonable.