Selling a Small Business on Your Own
Many companies are too small for business brokers to bother with.
Selling a small business by yourself is never easy. But some small businesses don’t have a choice: Most reputable brokers won’t take on a business that will sell for under $250,000 because the fees aren’t worth their time. And, with commissions of 5% on the first $1 million, the cost of a business broker may seem a bit much.
Business owners have two main options, says Rick Rickertsen, co-author of Sell Your Business Your Way:
- Go out and look for a strategic buyer. This could be a nearby company in the same line, which could use your business for expansion. Or it could be an employee who is ready to take over.
- Selling on the Internet. This is an increasingly popular option. There are several national sites, such as BizBuySell.com, BizQuest.com and BusinessforSale.com, which list businesses for sale and buyers and can also provide direct-marketing services.
When Tom Bianco and his partners were trying to unload Wing Factory, an Atlanta restaurant, for $225,000 in 2000, they didn’t want to pay a broker’s fee and figured they knew many other restaurateurs who would buy it. “We used word of mouth to identify people but tried to keep it quiet,” he says. “Once the employees find out, service can go down the tubes.” After six months, the restaurant was sold to a former manager who raised one third of the price and agreed to pay the remainder in three years.
|
Looking to learn whether a broker will sell your business, go to the website of the International Business Brokers Association, www.ibba.org. If you write in your business and zip code, the site recommends brokers in your area. Read The Complete Guide to Selling a Business by Fred S. Steingold (Nolo Press, 2005) or Sell Your Business Your Way</i> by Rick Rickertsen and Robert Gunther, (Amacom, 2006). |
If you don’t have a likely prospect sitting in a cubicle at your office, identify potential buyers in your area. Start with a casual conversations, advises John Reddish, owner of Advent Management International, a management consulting company in Drexel Hill, Pa. Call and suggest that it might be worthwhile for you to meet. Over coffee or lunch, ask the other executive how he or she is pursuing growth opportunities. This gives you an easy opening to bring up the possibility of a sale..
Selling on the Internet is pretty much the opposite tack: You’re asking thousands of strangers to look over your wares. BizBuySell has 44,400 active listings of businesses for sale and attracts 150,000 “unique visitors” a month. Caveat: Most of the listings are retail stores or service businesses—dry cleaners, hair salons, laundromats, and auto repair shops. Listing a business for sale costs from $159 to $199 (the higher price includes sending targeted emails to buyers) for two months. It also handles manufacturers, though that only constitutes 6% of its business.
Sellers provide information on revenue, cash flow, a description of the business, and their asking price. BizBuySell operates like “eBay for a business; we’re a marketplace for sellers and buyers,” says Michael Handelsman, general manager. As on eBay, buyers and sellers conduct their own due diligence. Handelsman says about 1,000 businesses sell monthly on the site, and many business brokers use it.
When Katherine Ryan and her partner wanted to sell Girlfriends, their women’s clothing store in San Francisco (they own another in Portland, Ore.) for $175,000 in winter 2006, they tried BizBuySell and sought their own buyers. After four months, the site generated about 20 real leads, buyers who “had done their legwork and were ready to make an offer,” Ryan says. Still, no deal was struck. Ryan has returned to trying to find her own buyers.
If you decide to sell your business to the guy across the street or a bidder on the Web, start by forming a team consisting of a CPA, attorney, financial planner (especially if you’re using the sale to fund retirement) and/or management consultant, suggests consultant Reddish. These professionals may already know other business owners in the area who are looking for acquisitions.
Rickertsen says that finding an attorney who knows liability law is most critical. “You don’t want to sell your dry-cleaning business and then face an environmental problem and have the new owner ask for half the purchase price back,” he says. Product liability is another concern that must be considered.
You also need a professional appraiser, who will charge $2,500 to $7,500 to place a realistic price on the business, which will help attract a buyer and make it easier for him to get financing. “Too many entrepreneurs think their business is worth a million dollars because of the sweat equity they’ve put into it and then are disappointed to find out what it’s really worth,” Reddish says.
When you identify a likely buyer, make the principles sign a confidentiality agreement. This is especially important if you are selling out to a competitor; it is not uncommon for a company to pretend to be a bona fide buyer just to get a peek into how your business works. Rickersten advises that you don’t hand over your client list until everything is signed.
And don’t forget: Seller beware. Make the buyer proves that he can swing it. You need to see that he has the cash and/or a formal commitment from his lender. Demand to see his credit reports and, if he or she operates another business, ask to see the books. Then request references and check them thoroughly, Reddish suggests. Don’t be shy. Sellers routinely hire private investigators to conduct lien searches, credit reference checks, and unearth previous financial improprieties. You want to know if they have bankruptcies or tax problems in their past.
Financing a deal can be done in many ways. Often, buyers want the seller to hold a carry-on note. In a $250,000 deal, for example, the seller might receive half the money upfront and the remainder in a note to be paid in five years. The note, which is secured by a second lien on assets, might pay the seller 8% annually until the final principle payment..
Earn-outs are another option, but can be dicey. For example, the owner sells the business to his top employees for $300,000, with little money down. If the business hits a certain benchmark, say $50,000 in profits a year, the owner receives that sum annually until the sale price is reached. “This deal produces more trouble for the seller because it’s dependent on the business doing well,” Reddish adds.
Businesses can be sold on an installment plan so that, for example, the seller does not have to transfer title until two thirds of the purchase price has been paid. Some titles don’t transfer over for five years or more, Reddish adds. Contracts can also stipulate that if the buyer falls behind in payments, ownership reverts to the seller.
Selling a business by yourself will always be a challenge. It is important to be patient—it can take years—and not neglect the business you are saying goodbye to. “Some owners get so distracted by the deal that they let their business go sour,” Rickertsen says.
