Some prospective business sellers tell me, “I don’t want to put in much time up-front in the business sale process, or provide much information. I’ll give you my tax returns and current financials and we want you to come up with a value, and put together a couple of pages of information about the business that can be provided to buyers who submit a confidentiality agreement. Let’s just see if there are buyers out there and then we can deal with getting them more complete information if they are interested.” This is a terribly short-sighted way of marketing a business. I believe that doing so significantly decreases the probability of a successful sales outcome, and is in neither the best interest of the business owner or the business broker (for this reason, Codiligent will not provide this type of representation).
Here are a few of the reasons why:
1. You want your business broker to become intimately familiar with your business so that they can effectively sell it. If a business broker does a comprehensive review of the business they will develop a far more intimate and comprehensive knowledge of the business which will allow them to more effectively promote your business, confidently answer buyer questions, and respond to objections. A business broker who is provided with only limited information and/or who doesn’t do a complete review of the business is unable to represent you as effectively.
2. There are a variety of issues that could impact value and marketability that may not be discernible by simply reviewing the past two years tax returns. For example: Are there proprietary systems or other types of intellectual property that give the business a significant competitive advantage? Is there a high concentration of revenue from a few key clients where if one were lost it would have a disproportionate impact on the business? Are there any key contracts that are expiring? Are there any outstanding claims or legal issues that may cause the business to change its operations?
3. Doing a comprehensive review of the business helps in establishing a defensible, realistic value and an appropriate pricing strategy. A simplistic multiplier approach or rule-of-thumb for valuation may significantly under-value or over-value a business.
4. Any serious buyer who considers moving forward with an acquisition of the business will insist on reviewing far more information prior to buying the business. Consequently, you will have to provide the information eventually, anyway, so why not take the time to do it right by providing complete information up front.
5. A large part of having a business sale succeed is in establishing the buyer’s confidence in the business and reducing uncertainty. Providing solid, complete information without delay decreases buyer uncertainty and increases confidence. Contrast this to a buyer asking a broker a question that requires information from the business owner. Perhaps the business buyer emails the question to the broker on Thursday morning, but the broker doesn’t get it until Thursday afternoon due to being in a meeting with another client. The business broker doesn’t have the information requested so they contact the seller. The seller says he will have to get the information requested from his CFO. The business broker reports back to the buyer that he should have the information within the next couple of days. However, unbeknownst to the broker the CFO is traveling until Tuesday. On Friday the broker still hasn’t heard anything back, so he calls the business owner but only gets voice mail and doesn’t hear anything back, since the business owner assumes his CFO is dealing with it. On Tuesday the CFO gets back, but is buried after being gone for a couple of days and doesn’t get the information back to the business broker until the following Thursday. So a week has gone by. What’s going through the buyer’s mind? ”Gee, I thought I made a pretty simple request for information. Why is it taking so long to get it? Are they serious about selling? Are they disorganized? Is there a problem with the information I requested that they are trying to fix? Maybe I should give more attention to another business I was considering.”
6. You run a greater risk that the price and terms will be re-negotiated as a result of due diligence, or worse – that the deal will die. If a buyer makes an offer based on incomplete material disclosure and then during due diligence discovers new information, there’s a good chance that they will use it to negotiate a lower price than they originally offered, or, if the information is significant enough, they may back out of the deal. This is problematic for another reason: most Letters of Intent call for an exclusivity period for the buyer from the time the Letter of Intent is signed until they complete due diligence (often a 2-4 week period). This means that active marketing and communication with other buyers must cease during this time frame, so in essence the business is off the market for 2-4 weeks.
Codiligent strives to do everything possible to increase the probability of attracting the right buyers, getting them to complete a transaction, and pay the best possible price and terms. As a result, the business selling process is necessarily front loaded with information requests, analysis, packaging of the business, and researching logical buyers. This is often one of the most important transactions of a business owner’s life, and it deserves to be handled as such. Yet, just because the process is comprehensive doesn’t mean it will take significantly longer than if handled by a broker who fails to do a similar up-front process. Codiligent has developed a proprietary process and methodology that makes the collection, analysis, and packaging of the business VERY efficient. It is not uncommon for a 60+ page analysis, initial information package, and a 100+ page confidential information package to be developed within two weeks.
