7 Rules When Selling a Business to an Industry Buyer

For many business owners, selling the business on their own to an industry buyer is attractive  — particularly when they’ve been approached by an industry buyer.  They may avoid some of the work involved in preparing to put the business on the market.  They may maintain the confidentiality of the sale by dealing with only one buyer.  They save on the broker’s commission.  But, as with most things in life, there is a cost  — usually a lower selling price and other terms of the deal.  In many of the sales I’ve done to industry buyers, many of the industry buyers who didn’t buy the business made very low offers.  Here are some rules to remember when dealing with an industry buyer on your own.

1. Don’t believe the industry buyer and don’t get your advice from him. The buyer is not looking out for your best interests.  He is looking out for his.
2. Get a team of good advisors looking out for your interests. This would be an accountant, an attorney, an intermediary, and, perhaps, a financial planner.  You will probably have to pay them for their advice.  It’s money well spent.
3. Get a business valuation. Just because an industry buyer has bought a number of businesses in the industry doesn’t mean that they must be paying good prices for them.  You need a professional opinion of what your business should sell for.   If your accountant is a qualified appraiser, she may be able to do an appraisal.  But, don’t assume that just because she is an accountant, she is qualified to give you that opinion.
4. It takes time to sell a business and it takes even more time to deal with multiple buyers. Hire a professional to sell your business; don’t risk taking time away from it to “do it yourself” and have the sales and profits of your business go down as a result.
5. A purchase price based on an earnout is not a standard way to sell a business. An earnout is where the price is based on how the buyer does with the business after the purchase.  We rarely sell businesses with an earnout and where we do, it is based on a legitimate business risk that a customer, or customers, will be lost due to no fault of the buyer.  An earnout should not be longer than a year.
6. Check the buyer’s credit and get a confidentiality agreement signed before you deal with the industry buyer or give them any information about your business. Just because they own a business does not mean they have the money, or credit, to buy your business.
7. Don’t deal with only one buyer. In this situation, the buyer tends to hold the upper hand, particularly after an offer to buy the business is accepted.  If a business broker is handling the sale, buyers understand that there are probably other buyers that will buy the business if they make unreasonable demands.

One of the benefits of selling to an industry buyer is that the buyer MAY be willing to pay more for the business because doing so will increase their sales or profits by more than the two businesses do separately.  This is referred to as a ‘strategic” value.  But, an industry buyer won’t pay more for the business than they need to pay.  Because of this, using the “M&A Process” to sell the business is likely to obtain the highest price.  Briefly, here is the process: The business is marketed without a price.  The better strategic buyers are identified and contacted about the business for sale.  The goal is to generate competitive bids for the business to get the best price.  Because of the much greater time and money that it costs to run this process, the size of the business sale(and commission) must justify it.  We’ve done many of these types of sales.  Contact us for more information about using it to sell your business.