The Truth About Selling Businesses That Nobody Tells You
Selling a small business is a lot more difficult than most people realise.
Business brokers (and business-for-sale listing platforms) give the impression that selling is a breeze. Brokers often make out that they have a very high success rate. Business-for-sale listing platforms give the impression that all you've got to do is list a business in their marketplace and before long you'll have found a buyer and closed a sale.
However, none of that is true. Over 80% of businesses that go to market do not find a buyer!
And when a small business does find a buyer, the chances are that it will not be at anywhere near the price the owner was expecting.
Some truths below.
Buyers wear grey tinted glasses
Whatever your opinion of the attractiveness and potential of your business, the chances are that no buyer is going to recognise that! This is the where most small business owners get their first whack of reality. Buyers believe that you're seeing everything with rose tinted glasses. And you may come to the conclusion that all buyers are viewing your business with grey tinted glasses.
The perception gap can often be huge.
You'll probably have to lend the buyer money!
You'll probably have to finance part (or all!) of the purchase price. The higher the price of the business, the greater the chance that the buyer will expect a "seller's note" ie. credit.
What does that mean? It means that you'll probably have to lend the buyer money to buy the business from you!
Huh?! That can't be right, surely?
Unfortunately, it's true. Most buyers will want at least part of the purchase price to be deferred. So once you've agreed a price they'll probably want to pay just part of it now and spread the rest of the payment over the next 2-3 years.
There are two reasons for this. The first is that the buyer has less money at risk (and it may even be that he doesn't have the funds to make a full payment). The second is that he believes the business is more likely to do well in future if you have a continued stake in its success. If part of the price is going to be paid in the future, and if that payment is contingent on the continued success of the business, then that's a further risk reduction for the buyer and motivation for you to help the new owner make a success of his acquisition.
You don't like the idea of giving him a loan? You insist on being paid in full up front? If so then you'll probably lose the best buyers and will have to be willing to accept a much, much lower price.
It takes longer than most people expect
Vendors often list a business on one of the popular platforms and expect the enquiries to come pouring in.
After all, it's a fantastic business with a lot of potential!
Except that enquiries don't come flooding in. They trickle in over days, over weeks, over months, sometimes over years before a business is actually sold!
And taking a potential buyer from an enquiry to signing a contract to buy the business is a long process. Most buyers drop out along the way.
So whether you're selling your business yourself, or using a business broker, once the business is on the market and advertised at the usual locations, don't be surprised if you don't get a huge surge of interest from potential buyers.
In the first month of listing at somewhere like Daltons Business or BusinessesForSale, the average small business gets fewer than half a dozen enquiries. Most of those potential buyers won't even complete the Non-Disclosure Agreement (NDA) to get to the next stage.
Due diligence can become a full time job
Answering questions from buyers can become a full time job.
Vendors rarely appreciate just how detailed the legal and accounting due diligence can be. Even if dealing with just one buyer, answering their questions can fill your working day. If juggling multiple buyers and fielding questions from all of them, be prepared for a lot of tedious work putting documentation together and digging up old paperwork (and records) to answer all kinds of questions many of which will appear extremely silly to you.
Legal & accounting fees can leave you seriously out of pocket
Many of the questions your potential buyers raise will need to be answered by your accountant. Accountants often need to spend several hours / days on this work and they'll expect to charge you for their time.
But the largest bill is likely to come from the lawyer.
It's never a good idea to enter into the sale of a business without taking proper legal advice. This advice, together with the time to draft the contract of sale, can cost many, many thousands of pounds. To give you an indication, on a recent £2m sale, a vendor spent in excess of £20,000 for the drafting of the Heads of Terms and the Sale & Purchase Agreement. For another sale, a simpler one at £500K, the total legal fees came in at over £8,000.
Buyers don't care for your valuation
No matter who valued your business, buyers don't give a damn. They will come to their own conclusions about value and their value will likely be a lot different to valuations you've had from business brokers and the like.
It is difficult to emphasise enough how different buyers' valuations can be.
Two recent examples I have from people who've contact me for advice recently:
A lady who owns a care business got three valuations from different brokers and the valuations ranged between £500K and £700K. After one year of her business being on the market she had received 20 enquiries and only two offers for her business. Both offers were for less than £50,000.
A couple running a car spraying business had two valuations from well known brokers both of whom gave them a valuation of between £400K and £500K. After nine months on the market they had received only one offer, it was for £20K (with just £10K up front and the balance in installments).
It is not always the case that buyer valuations are so far out, but this level of difference in opinion happens more often that not!