It is important to understand market dynamics when selling a business, recognizing the right moment, and aligning with buyer motivations. The decision to sell can be one of the most pivotal in a business owner’s life, encompassing not just financial gain, but also the continuation of your legacy and the future of your team. Yet, the complexities of market timing and the fear of missing the right opportunity can be daunting, often leading to hesitation. In Lucrative Exits, author and expert business broker Gregg Kunz breaks down these complexities in the first two chapters, offering a clear, actionable roadmap to help business owners navigate the motivations and market forces at play, ensuring a successful and strategic sale.
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CHAPTER ONE
Motivations & Market Dynamics
Selling a business isn’t just a decision—it’s a journey. It’s a process. And throughout our time together in this book, you’ll hear a lot about that word: process. Because, believe me, process drives results. And an excellently executed process? That will drive excellent results.
One of the important aspects here is learning to expect and anticipate the unexpected. Unanticipated issues and questions will arise at the most inopportune time, and that’s a guarantee. But if you’re well-prepared and follow the process, you’ll navigate those challenges efficiently and effectively.
I’ve seen something all too often: a business owner wakes up one day, looks around, and thinks, “Today’s the day I sell my business.” But making such a spur-of-the-moment decision isn’t the key to a desirable outcome. It simply doesn’t work that way. The sale of your business doesn’t (and shouldn’t) begin on the day you decide to put it on the market for sale. A successful exit requires time, preparation, and ideally should begin as far in advance as possible.
The selling process can seem either too simple or overwhelmingly complex to many business owners. Some see it as an easy task, while others consider it a towering mountain they must conquer—all while keeping their business running. But here’s the thing: it isn’t either of those extremes.
Yes, it’s not a straightforward process. But with the proper guidance and approach, it’s also not insurmountable. The trick? Taking it in bite-sized pieces and breaking things down to address one by one. And that’s where experts like business brokers come into play. Having a seasoned guide by your side, someone who’s been there and done that will make all the difference. Your business broker is not just an advisor but a leader who’ll lead you through every step of the way, ensuring a less stressful and ultimately more successful outcome.
Decoding the Decision to Sell
Every business owner’s journey is unique, but several shared reasons might lead an owner to consider selling their venture.
- Retirement Plans: Whether it’s an early exit or a delayed one, retirement is often the driving force behind selling.
- Health Challenges: Illness or other health problems can push an owner towards selling their life’s work.
- Business Performance: Some owners face obstacles they feel ill-equipped to overcome.
- Partnership Conflicts: Disagreements with business partners can compel an owner to step away.
- Burnout: The relentless pace and pressures of business can wear out even the most passionate owner.
- Growth Barriers: Another decisive factor is feeling stagnant and unable to push the business beyond certain boundaries.
- Customers & Employees: Neither of these groups are always a joy to work with and it’s not uncommon for an owner to wonder why their efforts to please or care for others leave them unfulfilled and unhappy.
But there’s a flip side too. Some owners view their current enterprise as a stepping stone to something larger. With all the valuable lessons they’ve gleaned, they’re eager to leap into a new business venture, armed with enhanced knowledge and fewer blind spots. Their aim? To be more strategic, efficient, and ultimately successful in their next endeavor. Remember, hindsight is 20/20, but what you do with those insights is what ultimately counts.
The Misconceptions Surrounding Business Sales
There’s one fairy-tale notion that many business owners hold dear: “If someone came and offered me a great price, I would sell.” Here’s the reality check: unless you’re actively looking to sell, the chances of someone arriving with a sack full of cash for your enterprise are slim to none.
And then there are those unsolicited promises from third parties, most of which are less than genuine. They’ll claim to have a buyer ready and waiting for your business. A word to the wise: such promises often fall flat. If a broker or anyone else tells you they have a buyer, they’d better have one. This is why you need to work with someone you can trust and someone who has a depth of experience in selling businesses. As you contemplate the sale of your business, prioritize getting to know brokers in your market. An initial conversation can reveal much about their character, approach, and honesty. Remember, you’re not just entering a transaction with them; you’re embarking on a relationship from the onset of the sale process to the closing table – and likely to be a relationship spanning many months.
The Surprising Reasons Businesses Go Up for Sale
You might be nodding your head, thinking, “That’s all fine and good for everyone else but I’m ready to sell my business now.” But here’s something many overlook: while you may be ready, is your business? This is a point many business owners haven’t pondered and I often get blank stares in return when I bring up this subject. However, you, the owner, and the business must be poised and absolutely ready to sell.
Let’s face it: Business owners, like everyone else, have spoken and unspoken reasons and motivations for selling. Often, the reason they provide for selling isn’t always the whole truth. It’s not about deception; it’s human nature. They might not want to admit, even to themselves, that they’ve grown weary of dealing with demanding customers or that some days, their employees feel more like a painful burden than an asset. The reason for selling your business is deeply personal and unique to you.
A Serious Golf Addiction
To illustrate my point, let me share a story. I once worked with the owners of a wildly successful business. They each worked a mere 20 hours every other week and each took home over $300,000 annually. They were living what many would call the entrepreneurial dream. And yet, when I asked them why they were selling such a thriving enterprise, their answer was simple: they had enough saved up and wanted no interruptions in their early retirement. One owner humorously mentioned wanting to develop a “serious golf addiction.” He laughed when he said it but it was clear that he was absolutely serious about his personal motivation to sell.
While a buyer might be looking in from the outside, wondering why someone would give up such a lucrative existence, remember that everyone has their own definition of success and fulfillment. Some find joy in their day-to-day business engagements, while others, after years of dedication, want to pursue other passions and interests. Selling is about you. Your motivations to sell are yours alone. Embrace them.
Balancing Personal and Financial Factors in Selling Your Business
The balance between personal and financial reasons for selling is delicate. Business owners often grapple with the uncertainty of when to pull the trigger and place their business on the market. What’s more pressing? Your health and personal life or the financial factors that surround your business?
Unfortunately, personal reasons, such as health and family matters, can make the sale of a business a pressing necessity. Think of preparing to sell as setting up a Will or Estate Plan for your business. Just as it’s a mistake to pass away without a Will, and leaving your estate’s distribution to the whims of the state, not preparing your business for a potential sale is a significant misstep and, in the worst cases, a devastating blow to your family’s financial well-being and future security.
If unexpected events arise – and they often do – your preparation ensures you’re not caught off guard. It means you have set your business up to be desirable to potential buyers even under unforeseen circumstances. As brokers, we are limited to the hand we’re dealt. However, any bit of planning and preparation can tip the scales in the seller’s favor for a successful exit no matter the circumstances. In addition to preparing your business for an unexpected sale it just makes plain sense to know the value of your business. That is, what is the price that the business is likely to sell for.
Before diving into the financial or economic factors, let me highlight a tool in our arsenal: the Broker’s Opinion of Value. While it might sound a lot like valuation, they are distinct from one another. Only certified valuation professionals can issue a “valuation.” In our realm, as brokers, we’re determining the most probable selling price range for a third-party buyer, not for the purposes of a Buy-Sell agreement or a Divorce, where ‘value’ may take on an entirely different meaning. Business brokers are completing transactions in the market each and every day. The combination of the analytical tools they use, their business acumen, and their experience in the business sale marketplace will provide you with the most factual understanding of the value drivers in a sale and the most likely selling price range.
Our goal isn’t to forecast every potential scenario but to evaluate how the business would fare in a realistic market scenario. Economic fluctuations, market saturation, regulatory shifts, declining profits, or even your product becoming obsolete (think of VHS tapes and tape cassettes) can have pronounced impacts on a business’s appeal. But as brokers, our North Star is the most probable selling price range to a third-party buyer.
Contrary to personal reasons that demand swift decisions, economic factors usually offer a much longer runway in determining if this may be the time to sell. Well-run businesses with diverse income streams and delivering consistent profits can often navigate economic challenges unless they face the sunset of their product or service. If your gut feeling foretells a declining market or an unfavorable economic trend, it’s a cue to ready your business for sale. And remember, the average time to sell a business ranges from five and ten months. Depending on the business you are in, the readiness of the business for sale, and changing market conditions, a sale may take a year or longer.
Changing Market Conditions in Business Sales
As business owners, it’s easy to get lost in the noise of daily headlines. We read about the economy’s trajectory, unemployment trends, and more. These, however, are macro conditions. For the Main Street and Premier Main Street business, like the automotive repair shop serving its community for decades, these broader economic waves might have a less direct impact than you’d think. So, if the general economy is going south, it doesn’t mean your business is on the same path. Strong, well-operated, and well-prepared businesses tend to sell for premium and realistic prices regardless of the macroeconomic environment. In the past couple of years interest rates began climbing quickly. Both buyers and sellers called with similar comments with the same underlying concern; “This must be a bad time to sell/buy a business.” Let me assure you, great businesses are always in demand.
One of the potential pitfalls is being overly reactive to these national or global market indicators. Buyers and sellers alike can fall into this trap, assuming that high interest rates make it a bad time to buy or sell. Remember, a great business paired with a knowledgeable and confident broker can create a transaction structure to mitigate external circumstances beyond the business owner’s or buyer’s control. Focus on your geographic and industry market. Understand the nuances, and if you’re a business whose customers come from a close geographic radius, the local market conditions genuinely matter more than national market conditions. Larger global enterprises will need to take a broader view, but the principle remains: know your market intimately.
In fast-evolving market trends, it’s common for both buyers and sellers to become confused and forget reality. I once worked with a client who owned a multi-location driving school. We met with two prospective buyers, partners who were very well-qualified in every way. They stated that the business met nearly all their criteria. However, in the end, they backed out, citing concerns about the future impact of self-driving cars on the driving school industry. Their reasoning was rather amusing. It seemed to be more of a convenient excuse rather than a concern grounded in fact. It was their absolute barrier to moving forward despite the fact that every other financial and operational aspect of the business met their criteria. Think about it, even if self-driving cars become the norm, there will still be a need for driver’s education and licensing. Even in an automated world, people must understand how to operate vehicles. What may happen many decades into the future should not stand in the way of buying a business today, and evolving the business as industry trends may necessitate. Don’t let distant, speculative concerns overshadow the value of a business, nor allow buyers with false objections to get in the way of the truth.
Impacts of the Digital Age
Entering the business brokerage world in the digital age has been a blessing. The ease with which businesses can now be presented and marketed is remarkable. We have more tools at our disposal than in the past, from specialized platforms to targeted social media campaigns. Gone are the days when placing a classified ad in a newspaper was our primary avenue. At the same time, do not conclude that selling a business in the Digital Age is easy. It may help to locate a buyer, but as you will learn, not all self-titled buyers are real buyers and the real work for the broker actually begins after a serious buyer is engaged.
The digital age has streamlined processes across the board. It has created efficiencies across all industries but it’s also brought challenges to others, particularly the ever-present shadow of e-commerce. Every package dropped off at a doorstep is a testament to evolving business models impacting one another, sometimes to the point of extinction.
Whether a local bookstore or a pet store, businesses, especially retailers, feel the pinch from e-commerce giants. The message here is clear: innovation waits for no one. Think of the once-popular products and services that are now relics of the past, whether buggy whips, VHS tapes, or taxis. If you don’t keep an ear to the ground and understand the changing preferences and technological advancements, you might find yourself blindsided when you decide it’s time to sell.
As you contemplate the sale or purchase of a business, remember to strike a balance. Understand the macro, but act on the micro. Embrace the digital, but don’t forget the timeless principles of business. And always, always stay informed and remain adaptable.
Walking a Mile in the Buyer’s Shoes
When you’re on the cusp of selling your business, understanding the mindset of potential buyers will make all the difference. While business owners like yourself may be natural risk-takers, buyers, especially first-timers, are often treading in unfamiliar waters. Their initial enthusiasm can be overshadowed by anxiety about potential risks, especially as they come to grips with the weight of their impending purchase. Unlike being an employee, where there’s a safety net in the form of consistent paychecks and set responsibilities, owning a business means shouldering every responsibility, rain or shine. There is no need to over-emphasize this to a prospective buyer, but providing encouragement will go a long way to selling your business. This encouragement will ideally come from you rather than only the broker whose words of encouragement may be received as a sales tactic. Let’s face the reality that the vast majority of the population believe that brokers, be they auto, insurance, or business brokers are trying to sell them something. Selling a business must be a collaborative process with the business owner and the broker.
One effective strategy I’ve always believed in is proactive problem-solving. Anticipate the buyer’s concerns and be prepared with answers. Full disclosure of issues, potential or other, need to be shared with your broker. This will enable you both to have an articulate and believable answer when a buyer asks rather than being blindsided.
A few years back, I worked with a very successful and especially profitable hail restoration business focused on the automotive sector (paintless dent removal). It was easy to anticipate a very real concern for a buyer and one that, if we could not overcome, would kill the prospects for a sale – hail is a weather-dependent event. It is an unpredictable act of nature. It would be folly for the broker or seller to try to convince a buyer otherwise, and I knew that it was likely the first and most insurmountable objection from a buyer unfamiliar with the industry. Remember that the vast majority of buyers have little understanding of your industry. You are the expert in your industry and you should not allow their incorrect assumptions to remain.
I spent days researching all I could about Colorado’s weather and, specifically, the frequency of significant hail events. In conjunction with Colorado State University and NOAA, I gained access to detailed weather records spanning the last 140 years (and plenty were of the handwritten type). What we were able to document was that in the prior 140 years, there was only one year in which there was not a significant hail event across the business’s geographic service area. Because these events created a backlog of work for as much as 36 months, the actual risk to the business was small. The perceived risk was large, but the actual risk was minimal.
If a business owner dismisses a buyer’s fear (risk) or attempts to hide or gloss over a perceived risk, it will kill a deal. Smart brokers (and I consider myself one) dig deeply to determine real and potential areas of risk and to address them early in the process. If you identify, surface, and address a risk with a buyer early in the conversation, it will likely fall by the wayside and not derail an otherwise good transaction. Never underestimate the impact of perceived risk from the buyer’s perspective, as it may kill the transaction even at the closing table. Remember that by surfacing and addressing perceived risks you will build credibility with the buyer which can make the purchase of your business even more compelling.
A Final Note About Transparency and Preparation
Transparency is the foundation of any trustworthy business transaction. As a business owner, it’s not uncommon to have specific details about your business you might want to keep hidden. These could be minor oversights or more significant issues that feel embarrassing or, quite frankly, detrimental to a successful sale.
Conversations with buyers, especially the savvy ones we aim to attract, are a series of questions and answers. They will probe and ask predictable questions, as well as some you’d never anticipate. In these exchanges, any weaknesses, obstacles, or potential deal breakers in your business will come to light— if not early in the conversation then most likely during due diligence. If these aren’t disclosed and addressed upfront, you can be sure the lender or the buyer’s advisors will catch them, potentially jeopardizing the entire sale.
This is not to say that you should surface a risk that is part and parcel of any business. For example, attracting and retaining staff. Staffing is always a challenge for every business. Is it a risk that needs to be surfaced if the buyer asks what other risks they should be aware of? I am of the opinion that this one in particular, while a risk, is so prevalent across all businesses that it need not be surfaced. Is it a risk or simply a normal part of business? This does not mean to duck the question if asked, but to answer it appropriately. The correct way to answer the question is, “As with all businesses, attracting and retaining employees is important, and a smart owner should always be looking for talent as well as treating their employees well, as we do”.
If, as a broker, I’m unaware of both perceived and actual risk-related questions, and how the owner will address them, the ramifications can be catastrophic. Deals can collapse, and in some instances, the business might even become unsaleable. It’s a heavy price to pay when months spent in the sales preparation and process lead to a dead end. This becomes a severe time waste and can compromise the deal structure and leave significant value on the table. Never let your broker be surprised because you failed to make them aware of a potential area of risk, and if it is an adverse material fact, you must disclose it. Trust me, honesty counts.
A Testament to Proper Preparation
I recall a business owner reaching out shortly after 2022 wrapped up, eager to sell. Our initial meeting made it apparent that they were perhaps the most properly and well-prepared seller client I’d had the pleasure of working with. Their financials were up-to-date, tax returns filed, and they meticulously documented everything spanning the last three to five years.
But more than just being organized, they understood their business inside and out—from knowing their numbers to having every process and procedure fully documented. They were significantly more well-prepared than most, and we valued their business by over $600,000 more than the other broker they had spoken to. The overall quality of their business supported a market multiple at the highest end of the range, and we were absolutely prepared to defend our value determination to a buyer, a lender, and the lender’s valuation expert. If I could point to why this was one of our most successful outcomes it would be this: the owner took the preparation process to heart more than a year before he contacted me. He was ready and his business was ready. It paid off in spades.
KEY TAKEAWAYS
- Selling a business is not a spontaneous decision but a well-planned process. A well-executed process drives successful outcomes.
- Market conditions evolve and change over time. If your business is not evolving to meet these changes, the value of your business today may be far different than when it is your time to sell.
- Don’t get lost in macroeconomic conditions; focus on your specific market. Understand its nuances and adapt to changes while considering the timeless principles of business.
- Preparation results in a successful sale. It’s not just about the day you decide to sell; it’s about getting your business ready for the sale from the time you open your doors.
- The sale process is a collaboration with your broker. They are experts in the process – you are the expert in your business. Don’t disrupt their process and don’t have them try to become the expert on your business. In short, know each other’s role.
- Viewing your business through the eyes of a buyer is critical to a successful exit and identifying perceived and actual risks, and how to address questions for each is imperative.
- Preparing to sell is not a one-time event, nor is it a ton of work. It is process-driven and the process must be allowed to unfold.
CHAPTER TWO
When Preparation Meets Opportunity
Just like you invested time, energy, and passion into building your venture, you want to ensure you exit at the right time and for the right price. We’ve all heard the saying, “Failing to prepare is preparing to fail.” This couldn’t be more accurate when it comes to selling your business.
Consider this: If you’re selling a product, you’d think about its presentation, right? Packaging, marketing, and positioning all play a role. Your business isn’t any different. Preparing to sell is about looking at your company not just through your eyes but through the eyes of potential buyers. It’s easy to say, “My business is fantastic; who wouldn’t want it?” You might be familiar with “The Golden Rule” of treating others how you’d want to be treated. But when selling a business, I’d urge you to follow “The Platinum Rule:” Treat potential buyers how they want to be treated. That is, view your business through their eyes. This shift in perspective can make a world of difference.
By focusing on the right aspects of your business, you can fetch the highest exit price, and your business will be genuinely appealing to potential buyers. And trust me, if you diligently follow the steps we’ll discuss, you might even nail down a price higher than your initial listing price. How? You’ll attract multiple offers by making your business irresistible, fueling a competitive buying environment.
Emotions as the Invisible Players in Your Sale
How do you determine if you’re emotionally and practically prepared to sell your business? The answer is more complex than you might expect.
The sale of a business isn’t just a financial transaction; it’s an emotional one, too. Many owners underestimate the intensity of emotions that arise during the sale process. In all cases, it’s vital to recognize that selling a business will feel more like a stressful marathon than a sprint to a celebratory finish line. Keep your eye on the goal and your emotions under wrap.
My experience shows that you’ve conquered half the battle if you can set your emotions aside and trust a seasoned expert to guide you. But remember, it’s easier said than done. Every business sale has its obstacles, and it’s a roller coaster of emotions. But by leaving those feelings at the door and letting an expert guide you, the process can be educational and profitable.
Practical Preparedness
On the practical side, brace yourself for some news: your business might not be in its prime selling condition. A successful sale demands thorough preparation to make every aspect of your business as presentable and appealing as possible to potential buyers.
Consider franchises, for example. They’re desirable because they come with an established playbook. Everything is set – from hiring procedures to dispute resolutions. Buyers prefer businesses that don’t require them to reinvent the wheel. If you’re prepared with a plan for the buyer, you’re setting your business up for a seamless transition. And remember, your definition of “simple and easy” might not be the same as a buyer’s. This difference in perspective is natural, but having a comprehensive plan will help bridge that gap.
Looping in Your Spouse
And oh, a little side note, but it’s a biggie: Have you spoken to your spouse about selling? If they’re not on board or unprepared for the post-sale changes in your lifestyle, you could be in for a bumpy ride. Get them in the loop to make sure that they are onboard with your plan.
Reality Check
When considering a sale, it’s not always only about the highest price but may also be about legacy in the community and the welfare of employees. During our initial interactions, one of the primary questions I ask owners involves aspirations – not just about the sale, but life post-sale. Do they care what type of personality the buyer has? After all, once you ride off into the sunset is it especially important who owns the business? Perceptions may be far different than the reality and the facts need to be understood before your decision to sell is put into action. It’s essential because there’s a sea of misleading information out there. Many owners are shocked when faced with unexpected realities like:
- The sale price might not match their expectations.
- The after-tax proceeds will be significantly less than the sale price.
- Employees might be treated differently under a new owner.
- The new owner’s personality or moral compass may be different from yours.
- The business’s legacy could fade in the eyes of customers and the market you have served over many years.
If price is your sole focus, you might compromise on the buyer’s nature. But if legacy matters more, you could trade a bit of the price for the right buyer. Change to your business post-sale is inevitable. Accepting this can save you from lingering regrets. In your early conversations with brokers you need to share your motivations, concerns, and what you envision the most appropriate buyer to look like. Whether they are like you or not does not mean the business will not thrive under their leadership. Be clear when stating your motivations for the sale to your broker. This will not only begin to build a strong working relationship but it will enable them to begin to understand the type of buyer which will be a good match with you as well as the business.
It’s not just the buyer who will be scrutinizing your business. Banks, appraisers, attorneys, accountants, and the occasional unsolicited advice-giver are all weighing in. And while we might all appreciate a bit of flattery now and then, this isn’t the time for it. It’s the time for clear-eyed assessments. Every business has flaws, but with a little effort, there’s always room for improvement – and making time for that improvement will pay off at the closing table. Don’t feel overwhelmed by the changes or improvements the broker may suggest. They tend to be much less costly and time-consuming than you might expect. Great brokers know what savvy buyers are looking for, and failing to make these small recommended improvements will cost you at the closing table.
Your perceptions might not align with the market reality. While you might see untapped potential everywhere, a savvy buyer will wonder, “If these are such golden opportunities, why haven’t they been pursued?” You must be prepared to answer this question as it is certain to arise. If you do not have a sensible and believable answer, the buyer will not buy into it. Falling on your sword, allowing yourself to show you are as vulnerable as others, and truth-telling tend to be well-received by buyers and may help to strengthen the buyer-seller relationship early in the process.
Rely on the broker’s experience and expertise when determining your business’s worth. And no, that doesn’t mean turning to friends, spouses, accountants, or even your gut feeling. Trust someone who sells businesses day in and day out. Brokers are serious about the determination of the value of your business. They undergo rigorous education to understand how to value a business, and they are the ones who have to defend that value determination to buyers, lenders, and the lenders’ business appraisers. They’ve seen the patterns, the pitfalls, and the triumphs. As for your business’s potential? While it’s important information, it’s generally not what determines the final price. In today’s world, the price is a function of the overall financial benefit to the owner. Period.
The Humble Road to Success
I continue to be amazed by the success stories that come from what society often dubs as “blue-collar” businesses. These hard-working men and women, covered in the grit and grime of a day’s labor, do not fit the stereotypical image of success. Yet, behind the facade, they have stories of tenacity, humility, wisdom and the wealth that would put many white-collar achievements to shame.
Pat was a prime example. He hailed from a lineage of auto mechanics—those dedicated individuals with perpetually darkened hands who work diligently on what we choose not to. Society rarely gives them much in the way of recognition as we tend to do with ‘white collars’. Pat found his calling in auto body repair, where he channeled his passion for perfection, pleasing others, and his artistic touch.
His reputation became legendary across Denver and its neighboring states. People would travel for hours to get their cars worked on by him. But as with most success stories, there were times when he had to make challenging decisions grounded only by the facts he had collected and his gut feeling.
In many ways, the conventional auto body business model is dictated by insurance companies. These giants set the terms, sometimes compromising the quality of repair in favor of speed and cost-efficiency. Pat, however, valued the artistry of his work above all else. He boldly decided to cut ties with the insurance companies who sent him business but also dictated all aspects of the repair. It seemed to Pat that he was sacrificing the security of guaranteed work for the integrity of his craftsmanship and that eventually drove him to cut ties.
The result? An 80% drop in business from the insurance companies that had kept him busy year after year. But instead of panicking or returning to the hands that had fed him, Pat turned adversity into opportunity. He invested in an industry consultant, who, even though two time zones away, provided invaluable guidance and insight. With a roadmap tailored uniquely for him and a newfound advisory team, including a savvy CPA, Pat turned his business around, doubled revenues, tripled his profits, and expanded his operations.
When I met Pat, he was not only ready to sell but had established an extensive plan that made his business an attractive proposition for potential buyers. The net after-tax proceeds from the sale promised him a comfortable retirement and a legacy for his family. Not only that, but the changes and improvements he made to the business allowed him to bank plenty of cash in the years preceding the sale.
This isn’t just Pat’s story. It’s the story of countless business owners who have found their path to greatness despite challenges, humble beginnings, or lack of formal education. It’s about recognizing one’s strengths and, more importantly, one’s weaknesses. It’s about seeking help when needed, continuous learning, and, above all, keeping the integrity of the work at the forefront.
Pat’s journey from a dedicated artisan to a thriving business owner wasn’t without its challenges. But with a trusted advisory team, including experts like consultants and CPAs, he charted his path to success. It’s a lesson for every business owner: you don’t have to know it all. Surrounding yourself with the right team can take you from where you are to where you want to be. Being humble enough to ask for help is not a weakness but a strength.
Financial Health: The Heartbeat of Your Sale
The financial health of your business is pivotal. A business with declining financial performance is especially hard to sell. If you’re wondering who’d be interested in a business that’s not thriving, you’re not alone. In the corporate realm, there’s often a safety net, a salary, and incentives for turnarounds. But in the business owner’s world, the financial risks are yours alone. Every decision impacts your pocket directly. Trust me, there are extremely few buyers willing to acquire a failing business and, as importantly, virtually zero lenders who will participate in the deal. In the unlikely event that you can find a willing buyer, be prepared for little in the way of a cash down payment as well as financing the sale with Seller Financing with future payments contingent on the buyer’s ability to turn the business around. Buyers will want to be cautious with the cash they have for a down payment in case the business continues to fail.
Don’t misunderstand me; growth isn’t the sole indicator of a business’s success. Once they’ve achieved a comfortable plateau, many owners rightly choose to enjoy the fruits of their labor. Such businesses can be delightful to sell. However, selling becomes a complex challenge when the decline is due to the failure of the owner to adjust to industry changes or poor management. If you find yourself in this tricky position, your broker must have the ability to craft a compelling and credible narrative that resonates with potential buyers.
Turning around financial health isn’t about slashing prices or reducing salaries. Instead, consider consulting with a proficient fractional CFO or CEO. Explore the root causes of your financial challenges and get referrals to experts who can help. I’ve observed a recurring theme: Businesses often falter when they skimp on marketing, advertising, or customer relations. Think of advertising as an investment, similar to building your retirement fund. Marketing and advertising can be the quickest path to increasing financial performance.
Some may believe that cutting costs will increase the financial performance of the business. In the very near term this may be likely, but cutting the wrong costs can cripple a business for the long term. Saving your way to success rarely works.
If you want a litmus test for your financial records, get them under the lens of a business broker and at least two SBA bankers. These folks will let you know if your financial performance and documentation are up to the mark. Your lender, being the most risk-averse of all parties to a transaction, will be the judge of your accounting and financial reporting, so getting their nod is imperative.
And if there’s an issue? Rely on your broker to connect you to qualified and experienced bookkeepers and accountants to rectify any problems. However, remember that if you’ve been sloppy or dishonest, there may be little that can be done.
Financial or accounting missteps can come in various forms. You must be cautious, whether it’s inconsistencies between tax returns and income statements or dubious handling of personal expenses through the business. Always maintain detailed documentation, especially for any personal expenses that you hope can be added back to increase the business’s value.
Lastly, you’re accountable for your tax return, not your tax preparer. Get someone you trust who offers more than just tax preparation – someone who provides advice and guidance.
I’ve had my trusted tax expert for over three decades, and he’s been my sounding board for not just tax matters but business, family, and estate decisions. Such relationships are invaluable.
The clarity of your financial statements is as important as the numbers themselves. While you’re juggling roles as a business owner, prioritizing bookkeeping might seem less urgent. However, a solid financial foundation can streamline your business operations and make it more attractive to buyers or render it unsalable.
What Buyers Really Want
Many people, buyers and sellers alike, get caught up in the allure of top-line revenues. But is that what truly matters? No, in fact, revenue has little to zero impact on the value (price) of a business. Profitability, on the other hand, lies mainly within an owner’s control. Savvy owners know the ins and outs of their expenses and how to maximize their bottom line. At the end of the day, the value of, and the price paid for a business is based on the financial benefit realized by an owner in terms of profit, not revenue. In the business brokerage world this financial benefit is called Seller Discretionary Earnings (SDE). The terms Owner Benefit and Adjusted Cash Flow may also be used but I caution using adjusted cash flow as it can have various applications when speaking about the financials of a business. For this reason I will use the term Seller Discretionary Earnings, or SDE, as we move forward. There is another term which you may have heard of: EBITDA or Adjusted EBITDA. How do they differ? EBITDA, as expanded on later in this book is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is used primarily for evaluating and determining the value (sale price) of businesses which approach and exceed $1,000,000 in SDE (comparatively speaking). As we move further upmarket above the Main Street business sale marketplace we may also use Adjusted EBITDA. This essentially uses the same (larger) add backs but not the wages paid to the owner, as well as their associated company-paid payroll taxes. For the vast majority of Main and Premier Main Street businesses SDE is used with the assumption that the buyer will be an owner-operator of the business. Private Equity, Synergistic, and Strategic buyers are normally ones where there will not be an owner-operator, but a general manager or equivalent.
So, if revenue and net profit are not the basis for determining the sales price range and SDE is, what exactly is the definition of SDE? SDE refers to the true financial benefit of a single owner of a business – above and beyond the net income shown on the Profit and Loss statement (P&L) or tax return. To calculate SDE we begin with the net income (or net loss) and add back the following expenses which appear on the P&L: owner’s salary, payroll taxes paid by the company on the owner’s salary, amortization, interest paid, depreciation, non-recurring expenses, discretionary expenses, and select and fully documented personal expenses of the owner paid by the business. Personal expenses like Health and Life Insurance, IRA contributions, and company-paid matches to IRA contributions are customarily added back and acceptable by a lender in determining SDE with accompanying documentation. Cell phone services, travel, meals, and the owner’s vehicle expenses may be accepted by a buyer in determining SDE but lenders usually remove these in their internal credit decision making. That trip to Costa Rica or the golf club membership may or may not be acceptable to the lender. Always maintain complete documentation for any and every expense that is indeed a personal expense but do not be surprised if the lender tosses them aside.
There are other expenses which may need to be adjusted for in calculating SDE. One that we see quite frequently is the wages associated with family members who have a full, partial, or even no role in the business. This is an item that needs to be explored in-depth on a case by case basis and best discussed with your broker rather than here. The thing to understand is this: when calculating SDE you cannot add back the full amount of that family member’s wages unless they are absolutely not involved in business operations. You must determine the fair market replacement cost of hiring a competent individual to perform the departing family member’s duties. If you were overpaying your spouse for example, you may add back the difference between what you were paying them and the new replacement employee. If you were underpaying your spouse then a negative add back would be in order. The same holds true for business owners who also own the property from which they operate, where they are essentially paying themselves rent. Proper SDE calculation must have the rent expense normalized to the amount that they will charge the new owner/tenant.
Another area of caution: Personal expenses camouflaged as business expenses can backfire. Aren’t these “add-backs?” There is more to it than a simple yes, no, or maybe.
Not too long ago, I sat down with the owner of a successful apparel company in Colorado. To give you some context, this company was raking in revenues of well over $7,000,000. Yet, I was taken aback when I saw a whopping $300,000 in vehicle expenses. Upon probing, the owner explained his passion for performance cars and quickly mentioned that his accountant gave him the green light to run these expenses through the business. The logic? These expenses considerably lowered the business’s net income (which flowed through to his personal income), leading to significant tax savings.
I took a pause before commenting on this practice. It’s not my business to advise or judge how a tax preparer categorizes what goes on the tax return. These may be allowable by the tax code but also may be pressing the envelope. But I did make it clear to the owner that this was not just an eyebrow-raiser for lenders but also a potential red flag for any educated buyer. When he asked why, I explained that buyers might see this as more than just a “tax dodge.” They might wonder, if a business owner is willing to push the envelope here, what else might they be doing that’s not above board? Remember that strategies for minimizing tax liabilities may be fine several years before selling but they also may have unintended consequences at sale time – even if your tax preparer is willing to include them.
The way you operate your business might not always resonate with potential buyers. Even a whiff of unconventional practices can make buyers doubt other, entirely legitimate aspects of your business. Buyers and their advisory teams weigh the risks far more heavily than the opportunities. Make sure your operations stand up to scrutiny. Ethical considerations can and do influence a buyer’s perception, their offer, and the likelihood of a successful transaction.
The Value of Documentation, Intellectual Property, and Legal Assistance
The Win-Win of Documented Processes
A clear playbook provides Bible-like comfort for a buyer. Buyers don’t know your operations. If they don’t find documented processes, they may see chaos, and therefore risk. And here’s the bonus – once you’ve documented your operational aspects and shared them with every member of your team, it becomes more than just for the buyers. Your team will have clarity and understand exactly how to do the job correctly. Buyers will have the playbook they require, and, in all likelihood, your business will operate more efficiently, producing greater financial performance in the months and years leading up to the sale.
Unpacking Intellectual Property
You might think your enterprise is just another cog in the industrial machine, but it’s not. The unique way you provide your services, how you interact with clients, and the ethos of your business sets you apart. If you’re always pursuing excellence and improvement, you’ll outshine others. Your business will grow, attract loyal customers, and set new performance benchmarks.
Many years ago I founded a transportation service targeting affluent individuals and wrestled with the challenge of differentiating our business from the competition. On the surface, we were just another service provider like many others. But what set us apart wasn’t just our fleet of high-end vehicles; it was something more.
A client interaction with a well-known billionaire’s family revealed ours. An act as simple as a trip to a pharmacy to fetch over-the-counter medications for his wife turned into an epiphany for me. They were astonished by this seemingly minor gesture of service. What felt natural to me was a revelation to them. It dawned on me that we weren’t just in the business of transportation; we were in the business of making our clients more efficient. This wasn’t in our original business plan; it was our innate approach that naturally distinguished us. But to be sure, it became a hallmark of our service impressed upon every member of our team.
When you discover your secret sauce don’t keep it a secret. Tell your story in your marketing, instill it daily in your staff, and demonstrate it to your customers every day. Most of all, make sure that you tell your broker! Make no mistake, this is all a part of what makes your business attractive to a buyer.
Here’s my challenge to you: Step back and be introspective about each aspect of your business. Recognize those seemingly small actions, ethos, or practices that set your business apart. These are your intellectual property – your business’s “secret sauce.” These ingredients have helped you carve out a niche for yourself and will serve the buyer extremely well. Make no mistake; it is your unique intellectual property and should be shared with the buyer early and often during the sale process.
That client I served? They became one of our most loyal customers and sent a flurry of referrals our way, which over the years amounted to hundreds of thousands of dollars in profit. This wasn’t due to just the type of vehicles we offered or our punctuality but because of our culture of going the extra mile each and every day. You must understand why your customers use the service or products that you provide. In our case it was patronizing a transportation service that saved them time and made them more efficient. We were not simply in the transportation business, we were in the customer productivity business.
What truly adds value to your enterprise is what sets you apart from the competition. Identifying, nurturing, and leveraging your intellectual property will make your business attractive to potential buyers. As you go about this journey, ensure that your broker understands the critical importance of your intellectual property so it becomes an integral part of your business’s value proposition.
Legal Considerations
Before you sell, please schedule a consultation with a competent Business Transaction Attorney. Understanding the legalities, structures, and contracts associated with your business is essential. Some legal work may need to be done before the sale process begins. Your family attorney might be great, but get a second opinion from someone specializing in business transactions. Have them review your contracts and customer agreements. Can they transfer to a new owner? Address this well before going to the market. Bottom line: Legal advice can seem pricey, especially when it is simply to review your business, but it’s money well-spent.
The Importance of Collaboration and Communication
I genuinely believe that the cornerstone of a successful sale is strong collaboration, blunt honesty, and communication between the broker and the business owner. Effective communication before, during, and in the moments leading up to the sale will ensure a successful outcome. There is no perfect business, and each tends to have a problem area or two that a buyer will surface during the sale process. Share these with the broker and formulate a thoughtful and credible response for when the buyer brings it up. In many cases, mentioning and addressing it early in the conversation will make it a non-issue. It could become a deal-killer if it comes up late in the process.
Adapting to Unique Challenges
I recall an encounter a few years back with the owner of a sign manufacturing business—one of the oldest businesses in Colorado, boasting over a century of serving the market. Their situation was dire. Their largest customer had decided to skip a year in their purchasing cycle, severely impacting their financial performance. Their expense burden no longer supported by strong revenues threatened to overwhelm them. They felt they were at the end of the road.
Rather than the usual scenario where I was tasked to sell a profitable operation, I had a far more challenging situation. We were essentially selling assets: equipment, inventory, and, most importantly, a customer list—a list of valuable and recurring relationships built over decades. The immediate question was, how do you put a price tag on relationships, especially when there’s no guarantee these customers would continue their purchasing habits under new ownership?
Together with the business owner, we devised a method to quantify the value of each customer relationship. We knew this wasn’t a business for the public market but for a competitor. We initiated what we call our Targeted Outreach Process. Together we created a list of their competitors and ranked them based on several metrics: customer compatibility, likelihood of maintaining confidentiality during the sale process, the manner of how they did business with their customers, and financial capability. We started with a list of about 40 competitors and narrowed it down to a dozen who fit the bill. Our targeted outreach process is where it got exciting: within a week, we had a strong buyer lined up. Two weeks later, an offer was on the table that pleasantly surprised both the seller and me.
The deal was smooth, with no strings attached and no lender or seller financing. To the business owner it was pure magic. To me, this was a monumental success. Not just because of a successful outcome but because of the collaboration with the business owner. Together we had built a strategy from scratch, executed it, and achieved a favorable outcome. Your intimate knowledge of your business and the market combined with the broker’s adherence to a proven process can produce success.
On the other end of the spectrum, a business that is running at peak performance can be sold at a much higher price than one might initially expect. As mentioned previously, I had the privilege of working with the owners of a diesel auto repair business. From the get-go, I could see it was a gem. The state of readiness set this sale apart: the business was prepared, and the owners were informed, organized, and engaged.
They were the perfect clients—always available, always cooperative. We secured a full-price offer for their business and their property. But beyond the numbers, it was an ideal match in terms of ethos and values between the buyer and the seller.
Whether your business is a century-old institution or a modern marvel, clear-eyed assessments, a process-driven game plan, and the power of teamwork with your broker is critical. Success often finds us at the crossroads of readiness and opportunity, where thorough preparation makes the perfect match for a successful outcome.
KEY TAKEAWAYS
- Just as you crafted your business carefully, preparing it for sale requires the same attention and consideration. Objective and thorough assessment, a solid strategy, and teamwork between seller and broker are keys to success.
- Selling isn’t just about numbers; it’s an emotional journey. Trust experts, stay calm, and let their guidance lead you through the twists and turns. Above all, keep your eye on the prize.
- A thriving business is easier to sell. If your financial documentation needs work, consult a broker and address issues proactively. Above all, until your broker tells you that your business is ready to sell, don’t rush to market but instead follow their lead and get your house in order.
- The determination of the most probable selling price range is not based on revenue but on Seller Discretionary Earnings (SDE) multiplied by the industry multiple range for comparable historic sales. Determining SDE is a serious and detailed undertaking, the results of which must satisfy and be acceptable to both the buyer and their lender. Do not fool yourself into thinking that every personal expense run through the business will be acceptable to the lender.
- In calculating the most probable selling price range for the largest Main Street businesses the term Adjusted EBITDA tends to be used. It is very similar to SDE with select add backs (adjustments) but excluding owner salary and their associated company-paid payroll taxes.
- Questionable personal expenses of the seller, even when permitted by the tax laws, may result in concerns about other aspects of the business whether valid or not.
- Your unique approach and ethos set you apart. Identify, nurture, and leverage your intellectual property—your secret sauce makes your business attractive to buyers.
- Successful sales are built on strong collaboration and communication between you and your broker. When preparation meets opportunity, remarkable outcomes can emerge.