Over the years, I’ve made a number of sales to industry buyers. These were good deals for the buyer and seller. I’ve also seen offers from industry buyers that were very low – perhaps a fraction of what the business sold for. If you are considering selling your business to an industry buyer, here are some things to keep in mind.
Selling to an industry buyer is attractive to many business owners. They probably know the buyer. Selling to an industry buyer, rather than putting the business on the market, may keep the sale more confidential. The industry buyer is more likely to close on a deal because of their industry experience. They save the broker’s commission. The due diligence is easier. There are lots of good reasons to consider selling to an industry buyer. The question is whether it ends up being a good deal for the seller.
What are the potential drawbacks of a sale to an industry buyer? The price may be much lower than what another buyer might pay. I’m not referring to 10% or 20% less, some of these deals are a fraction of what another buyer would pay. Last year, I received an offer from an industry buyer, who had bought many businesses in his industry, that was 1/4 of what the business sold for. Another disadvantage of an industry offer can be the financing. Most of our business sales are financed with SBA 7A loans (which can go up to $5,000,000) with the seller financing being little to none. If the industry buyer’s business is not in great shape financially, the only way they can finance the purchase may be with seller financing. To make the deal even worse, some industry buyers convince sellers to make the sale price dependent on what the sales are after the buyer purchases the business.
Industry buyers can be very seductive and convincing. If they are not paying the best price, they are probably being very nice to the seller. People tend to give better deals to their friends than the “Gordon Gekkos” of the world. Since they have bought other businesses in the industry, the seller sees them as having credibility. The seller is thinking that If other owners sold to the industry buyer, it must have been a reasonable deal.
What are the lessons for a business owner?
- Get an independent business valuation from an accredited appraiser before putting the business on the market or making any deal with an industry buyer. The cost is low, generally about $3,500 if we provide it, and we deduct it from the commission when we sell the business.
- Get credit information on your industry buyer and have them sign a confidentiality agreement before you spend time dealing with him.
- Get a personal guarantee if you are financing any of the sale price. This includes if the financing is only supposed to be for a short period.
- Don’t make a deal where the price is based on how the business does after the sale – when you will no longer be managing it. Note: If you are in a declining industry, or have a high percentage of sales in one, or a few, customers, or have other circumstances that make the risk of retaining customers higher than normal, having part of the price based on customer retention may be reasonable.
- Putting a business on the market is the best way to get the best price for the business. The risk of breach of confidentiality is low with a competent business broker handling the sale.
A sale to an industry buyer may be easier than selling to an individual buyer, but that doesn’t mean it is the best sale for the business owner. If you are selling your business to an industry buyer, you may still want to use the services of an experienced intermediary to handle the transaction. In any case, as with any business sale, seller beware.