When I tell people what I do, most have never heard of a business broker. And I'll explain the profession as a 'realtor for businesses.' Which usually gets me a slight nod of understanding. But it's still not enough. Small business sales represent a large part of our local economies. Thousands of businesses are sold across the United States each year for totals in the hundreds of millions, if not billions of dollars. It's a relatively hidden area of business, of our economy really, that most business owners and even fewer professionals know about.
But how does it work? How are businesses sold? These are typically the follow-up questions I get. And I'd like to give a short explanation of how companies are sold in the US today.
The first thing to know is the business sale process can take as little as six months or as much as a couple of years, depending on the size of the business, the complexity of the transaction, and the seller and buyer's expectations. In general, all business sale processes have four significant steps:
- Determine the Value of Your Business
- Find a Buyer
- Negotiate a Deal
- Get You Paid!
The second thing to know about business sales is that the process differs depending on the business's size. There are three distinct markets of business sales, and each one has a different set of buyers and even a slightly different process:
- The Main Street Market represents most of the country's sales; over 90% of all deals fall into this category. These companies are your small, local businesses that generate less than $5 million in revenue.
- The Middle Market represents companies that generate between $5 million and $1 billion and revenue. It is broken up even further into three sub-markets, aptly named the lower-middle, the middle, and the upper-middle.
- The Large Multinational Market represents most of the transactions you hear about in the news when Facebook buys Instagram. This market is large companies that typically have revenues of more than $1 billion annually.
Determine the Value of Your Busines
The number one question most business owners ask before they sell is, "What is my business worth?" It's a great question with a complicated answer. As my mentor and podcast partner in crime says, a business's value is a function of both the quality and quantity of earnings in a company. No matter how many rules of thumb you read in articles on the internet (the internet always tells the truth, right?), you can't value a business on a rule of thumb. That means that the valuation of a business will be determined by how profitable it is, what industry it is in, and various factors that determine how efficient and scalable the company can be (which is most of what is covered in this Prep to Sell course). Ideally, for this step, you are talking to a professional business broker or certified valuation expert to get an idea of what your business is worth.
Find a Buyer
Locating a buyer is not an easy task. Referring back to my real estate metaphor, you can't change the wall color of a business, unlike a house. Finding a buyer for your business is not just about finding any buyer; it is about finding the RIGHT buyer; what we call the most probable buyer. The most probable buyer is the buyer who will 1. BUY your business 2. Give you the BEST deal for your business, and 3. Make sure that the company CONTINUES in operation. You have to find someone or a team with a similar skill set to the current owner and is a decent match for cultural values. We once sold a business with a party culture among the employees (and the owner) to two buttoned-up ex-bank executives. You can imagine what kind of cultural differences ensued in the first couple of months!
Negotiate the Deal
Once you find the right buyer, you have to get the right deal. And the right deal doesn't always mean the highest purchase price. Different factors are considered, one of which is purchase price; the others are:
- How long is the closing timeline?
- What percentage of that purchase price is received in cash?
- Where are the cash proceeds coming from, and how high risk are they? Are they bank-financed or provided by some distant second Uncle?
- What are the specific conditions and terms that need to be settled before closing?
- What are the implications for the employees?
- How long is the seller expected to stay on, and for how much?
Get You Paid!
The last stage is actually pretty anti-climactic. Paperwork is signed, the deal is done and a wire shows up in your bank account. Closed! From here, you move on to the post-closing process of telling your stakeholders (employees, customers, press) the company is sold and training and transitioning to new ownership.
I hope this blog was helpful in giving you a brief overview of how businesses are sold and what you can expect when you sell a business. Our next post will dive into How Businesses Are Valued. If you find these blogs informative and would like to be notified when a new one is published, please register here.