If you’ve been in business for awhile, you probably know many of your competitors and other owners of businesses in the same industry. If you are getting near retirement age, some of them may have told you to contact them when you are ready to sell your business. Now that you are ready to sell your business, selling to one of these potential buyers may look very attractive. You avoid the expense of a commission to a business broker to sell the business. You keep it off the market so it is less likely your employees or customers will hear that you want to sell. Since the buyer is in your industry, they are less likely to back out of the deal. Due diligence is probably going to be easier because the buyer knows the industry, will zero in on the most important information, and may ignore other information another buyer, or their attorney, may ask for.
So, what’s the downside? You may be selling your business for much less than it would sell for if you put it on the market. How much less? A few years ago, I sold a business for 4 times what an industry buyer offered to pay. This amounted to several hundred thousand dollars in this sale. When I met with the industry buyer and he gave me his offer, I pointed out that it was low and the seller was likely to reject it. I asked if this offer was just to start a conversation or what they expected to pay. The buyer, who had made many industry acquisitions, told me that this was in the ballpark of what they usually paid. When we put this business on the market, the seller received 5 offers and a sale was made to another industry buyer at a good price for the buyer and seller.
Let’s look at the reasons not to put the business on the market:
Confidentiality: A business broker should be able to maintain the confidentiality of the sale. A business broker will screen buyers to avoid breaching confidentiality and have them sign confidentiality agreements before revealing the identity of the business for sale. Their advertising will not identify the business by name or the characteristics that are advertised. We have our sellers review and approve our advertising copy before we use it. It seems that owners in almost all industries question whether other companies in the industry will honor the confidentiality agreements they sign. They do.
Saving the commission on the sale: Our commission is usually 10%, less than that as the amount of the sale goes up or if real estate is included. We increase the selling price, by putting the business on the market, by much more than this. We reach many more buyers, by the multiple ways we market a business, than a seller could know or deal with.
An easier sale to an industry buyer: We make many business sales to industry buyers – who pay a reasonable price for the business. We contact potential industry buyers directly and reach them with our other advertising. Since we know what the business should sell for, we can avoid dealing with buyers who are clearly offering too low a price.
How can you identify a bottom feeder? This is difficult for a business owner. It is likely that the potential industry buyer will connect with the owner because of their similar background in the same type of business. The potential industry buyer may even be a “friend”. They usually have strong opinions that they know what the selling price of the business should be better than anyone else.
The best way to avoid being taken advantage of by a bottom feeder is to get a business valuation from an accredited appraiser. An alternative is a selling price estimate from a business broker. This will give the business owner a good estimate of what the business should sell for. Then, find a business broker who will market the business to find a qualified buyer who will pay a good price for the business.