In the February 2010 issue of Inc. Magazine, there is an article titled “Business For Sale: So you want to sell? Good luck” which I found interesting. For those of you who don’t read Inc. magazine, each month the publication has an article on a business that is being offered for sale, either by a business broker or the owner. In the February issue, instead of featuring such a business, they reviewed six businesses that had been featured in 2009 and what the outcome had been. During the height of the recession, it may not be much of a surprise to learn that the sale efforts weren’t so successful – at least not yet. Out of the six businesses, part of one business sold, one business was taken off the market because the business improved so dramatically that the owner no longer wants to sell, another business was taken off the market after one principal decided to buy out his partner and retain the business, and the remaining three-and-a-half businesses are still being marketed and haven’t sold.
The headline saying “good luck” about selling a business, implying that you may not have success with a business sale, is a bit misleading. Here’s why: selling a small business requires a serious time commitment. The average marketing time frame to get a small business sold ranges from 7 months to about 1 year, depending on the study you look at. During the height of a recession, the length of time required, on average, is bound to be longer. So, if each of these businesses had started to be marketed at some point in 2009, it makes sense that most wouldn’t have sold, yet since it is only January 2010. In other words, the longest marketing timeframe would be less than 13 months by the time the magazine issue went to press.
The article quoted the owner of the business where one principal bought out the other as saying he “. . . regrets not hiring a broker to manage the attempted sale, a chore he says took up 75 percent of his time over the course of a year.”
Yet, hiring a business broker may not solve the time problem if you don’t hire the right business broker. There are huge variations in quality of business brokers and the amount of service they provide. For example, my company, Codiligent, a Portland, Oregon business brokerage, spends more time collecting information up-front in the representation process than most other business brokers, but over the entire representation process a seller’s time commitment to the sale will typically be far lower. Here’s why: when Codiligent collects more information up front, it develops a much stronger knowledge of the business, more accurately analyzes & values it, and develops stronger and more complete packages. Here’s what this means to you, as a business owner:
1, There will be a better understanding of how to market the business to attract the most likely buyers;
2, The business will be more accurately presented to prospective buyers meaning there will be less time wasted dealing with questions and tours from inappropriate buyers;
3, You won’t be getting continual calls from your business broker to get questions answered because he will already have a strong understanding of your business;
4, when an offer is presented it is more likely to “stick” and survive due diligence and purchase agreement negotiations because it will be based on more complete information; and
5, the due diligence process will likely be easier because it will be more of a process of verification of information already presented, rather than a process of significant discovery of new material information.
In contrast, many business brokers will spend far less time up-front understanding the business and will instead try to learn as they go, which at first may seem like a time savings to you, but here are the implications:
1, the business broker will not present the business as accurately which is more likely to lead to wasted time answering questions and touring inappropriate buyers;
2, the broker will not be able to answer many relevant buyer questions accurately which means that he will either continually contact you for answers to questions or he will try to have you do most of the interaction with the buyer (didn’t you hire a broker to take care of the process rather than doing it yourself?);
3, there is a higher risk that you will receive offers that won’t survive until closing because the buyer will depend more heavily on the formal due diligence process to discover material facts about the business, rather than verifying material information that has already been presented; and
4, the due diligence process will be far more cumbersome and will have a higher chance of failing.
So a few summary comments:
1. A realistic expectation for the amount of time it will take to market a successful business in a decent economy is 7 months to 1 year.
2. If you plan on trying to sell a business without professional representation it will likely consume most of your time (and you will likely make mistakes, leave money on the table, and ultimately may have a much higher chance of failure).
3. Business brokers vary dramatically in quality and approach – while a quality broker may use an approach that requires a greater time commitment up front, over the entire sale process you will likely have a far lower time commitment and the probability of a far better outcome.
