Guide To Selling a Business

In the case of small privately held companies, sellers and buyers approach a buy/sell situation from very different perspectives. Understanding the difference may help you in talking to prospects and may help you laugh off things that could cause you to lose your temper.

Emotional Attachment

To a seller the sale of a business that he or she started and devoted much of his or her life to is a difficult proposition. I've worked with sellers who would almost have less difficulty divorcing their spouses or putting their children up for adoption.

Sophisticated buyers are sensitive to this emotional attachment. Less sensitive buyers treat the seller as if he were selling a used car that he just picked up last week. While to a prospective buyer your business may be one more business to check out, an understanding of the emotional side of it would be nice, though not always forthcoming.

A seller's emotional attachment often manifests itself as an unreasonable expectation of what the business is worth. When a business owner sought to retain us to sell his business we inquired as to his pricing expectations. The owner said that he'd given it a great deal of thought and would accept $2,000,000 for the business. Since the company's excess earnings were approximately $100,000 we asked how he hade arrived at his price. "I've put 19 years of my life into this business," he replied, "and I figure that's the least 19 years of my life are worth."

A prospective buyer however, is not going to buy a small closely held business for at a P/E of 20 times trailing earnings, no matter how much effort was put into that business when the S&P 500 is available at roughly the same P/E ratio. Nor would the business be competitive with other businesses that are on the market selling for multiples of 2 or 3 times EBITDA,

Mutual Suspicion

A typical seller approaches a typical buyer with a certain healthy apprehension. Typical fears are-- What if this guy wants to pump me for information so he can compete with me? What if he doesn't have any money?

A typical buyer is equally apprehensive. He or she wonders, "What is the seller trying to put over on me? What is he hiding? Does he want to sell because of a potential calamity that I don't know about?"

A serious buyer will be willing to sell a Non-disclosure agreement and will also be willing to provide information as he gets information from the seller. The seller is entitled to know what the buyer's background is, how they intend to finance the transaction and to insist on some proof of financial capability. We suggest that early on in the process you insist on see a bank or brokerage statement (account number blacked out) showing the availability of 20% of the purchase price. Obviously, if the buyer is a publicly traded company or a Private Equity Group with a large fund this is a step that can be omitted. A word of warning, anyone can call themselves a private equity group, make sure that the one you are dealing with is legitimate and is funded.

There is no easy solution to this mutual suspicion. In a lot of cases it disappears or is at least lessened after buyer and seller get to know each other. In some situations, though, the apprehensions are justified.

Past Reality Versus Future Potential

Entrepreneurs are noted for their optimism. Sellers are fond of telling buyers what they themselves are convinced of: "The future of this business is so bright that an analysis of past performance can't do it justice." It is a rare seller indeed who tells me that he expects next year to be less profitable than the previous year.

Typically buyers want to talk more about the past performance as it is shown in black and white via financial statements. While the buyer may be equally as optimistic, he or she wants to value and buy the business based on the past. The buyer reasons that any future improvements will be based on his efforts and not yours as the seller. Again, there is no easy remedy to this difference of perspectives.

For example, you may have the world's greatest potato chip recipe, potato chips may be a billion dollar market, and capturing just 10% of the market may make your company very attractive, However, nobody is likely to buy a potato chip company with small sales based on just its potential. There are many challenges to growing a company, including new and existing competitors, building sales and distribution infrastructure, financing expansion, and setting up manufacturing. If someone buys a recipe and turn it into a billion dollar company, they will rightly consider their success a result of their hard work and good decisions,

Some Buyers Think They Can Easily Do Better

As you certainly know, people who do not have experience owning and running their own business have some erroneous ideas about what it entails. Some people think that it is much easier than it really is. Some buyers think they can buy your business and quickly double sales and profits! Sellers hear a buyer say this and (for good reason) get insulted. If this happens to you-- let it pass-- it is the buyer's naiveté.

The reality is that the new owner will be lucky to maintain the same sales level that you now have. According to studies, fewer than 5% of buyers double sales volume, and well under 50% of buyers are able to increase volume at all in the first year of ownership.

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