Great Ideas for your Small Business: Sell at the Right Time and Price
Business broker colin gabriel has some simple advice for entrepreneurs: Keep your financial statements audited and buff up your business plan. Why? Because you never know when a buyer will show up.
“The best buyers are the ones who come knocking on your door, because they have an interest in your company,” said Gabriel, author of How to Sell Your Business—And Get What You Want: A Pragmatic Guide with Revealing Tips from 57 Sellers (Gwent Press; 1998) and founder of Gwent Inc. in Westport, Connecticut.
Gabriel specializes in selling manufacturing companies with annual sales in excess of $3 million. In today’s global economy, there are no boundaries for where your buyer comes from. For example, Gabriel once brokered the sale of a New Jersey firm to a company in France that he found on the Internet. It gets even better: It didn’t matter to the French buyer that the New Jersey company’s electronic products were made in a Taiwanese-owned Chinese factory.
Savvy sellers know they will be put under a microscope during a transaction, but they turn the tables on the buyer by learning as much as they can about them. Doing your home- work may reveal what Gabriel calls “nasty surprises.” But it’s better to know of problems in advance, in case you need to call off the deal.
Don’t be afraid to ask the prospective buyer for a current balance sheet and details about the financing. Gabriel said many deals are highly leveraged, and the new owner may be planning to saddle your company with debt the minute the deal closes.
“With a leveraged buyout, someone will borrow 70 to 80 percent of the purchase price and laden the company with debt. The astute seller has to decide in advance whether to engage in a deal like that,” said Gabriel.
Borrowing money to buy a small business is common, he said, because it’s much easier to finance a $100 million deal than a $3 million deal. Your buyer may also ask you to pro-vide some of the financing by taking back a promissory note.
If you don’t want to end up owning the company again, don’t get involved in financing the deal.
Gabriel has this advice for the timing of your deal: “Go slowly before shaking hands on the price; after shaking hands, go as quickly as possible.” Moving quickly will help your employees and vendors accept and adjust to the changes.
Even when they are approached by an eager buyer, sellers often face a rude awakening when it comes to setting a value for their firm. Most entrepreneurs set the price for their business too high because they have worked so hard to make it flourish. “They are successful people, making lots of money, beating their competitors. They think this sale will be similar to other negotiations they have had,” said Gabriel. “It is not.”
He said many business buyers are practiced “and know the subtleties concerning taxes and other issues.” Before considering any deal, make sure you get solid legal and accounting advice. You have to determine whether to sell the assets of the business or the shares. Both have tax advantages and disadvantages.
Gabriel’s parting words surprised me: “Finding the buyer is not difficult; buyers are abundant. Good sellers are the ones in short supply.” Think about it!
Gabriel’s best tips for sellers
- Don’t be unrealistic about the value you place on your firm.
- Be patient. Art is auctioned; houses are sold slowly. Most businesses are like houses.
- Sell future profits and document these expectations.
- Invest in audited financial statements that permit you to close the deal faster and demand more cash at closing.
- Understand the financing and know what the balance sheet will look like after the closing.
- Disclose everything; problems can threaten the price and the deal.
- Remain on guard until the deal is signed.
- Take charge, listen to your advisers, but don’t give up the helm.
- Sell the assets or sell the shares. It’s usually better to sell shares rather than assets. If you sell the assets, you may face double taxation.