The simple truth is that businesses take time to sell. Selling a business is much more complicated than selling a house for example, and all of the pieces need to line up just right for a business sale to make it to the closing table. If a potential seller comes to us and says that they desperately need to sell their business within the next 1-3 months or they will have to close their doors, realistically we probably won’t be able to help them get their business sold in that time frame.
There is a good reason why our listing agreements run for 12 months, and that’s because businesses generally take 6-9 months or more to sell. So, exactly how long will a business take to sell? That depends on different factors, such as price, salability, size of the business, and industry. So, we are going to discuss the first two items in relation to how long a business owner should expect to have their business on the market before they are able to complete the sale process and hand the reins of ownership over to the new buyer. We will also offer some tips to those sellers who want to move their business faster than the average sale.
By The Numbers
Let’s take a look at the numbers and the actual data for closed sales in 2021, to get a clear picture of how long it’s taking from listing to closing for small to mid-sized business sales. Breaking up the numbers into Q1, Q2, Q3, and Q4, we saw a trend of “days on market” steadily going down each quarter. That downward slide follows the trends we are seeing in the marketplace, with fierce buyer competition, higher sales prices, and the desirable businesses being snapped up more quickly.
We pulled sold comparables from our national business sales databases, and the average days from listing to sold in 2021 was 303.5. That equals to just over 10 months from start to finish. At Green & Co. we track our numbers as well, and our average days on market is 245, which is just over 8 months. We are constantly working to improve our marketing and advertising strategies, and we continue to chip away at that number, as we’d love to see our average right around 6 months. While 8 months is just our average, our quickest sale ever from listing agreement signed to closing documents signed was 7 weeks. So it is possible to do it quickly, but the circumstances have to be just right. The majority of our deals close within that 6-9 month mark, so just be prepared to keep your business running strong until closing day.
We have the experience and expertise that tells us how we can shorten that time even more, and so much of it is down to factors that we as the business brokerage can’t control. It’s really the only business owner who can help us with those items, so here’s what you can do to get your business sold faster.
Price Your Business Right
The number one, undisputed factor in whether a business eventually sells or not is price. So, it is very fair to say that if your motivation to sell quickly is a big consideration in your situation, then the business needs to be priced accordingly. Even if you aren’t in a hurry to sell, overpricing your business from the start will cause it to sit on the market and become “stale,” with buyer after buyer just scrolling on by because the numbers don’t make sense.
It is absolutely true that buyers in 2021 paid more for successful businesses than they did in 2020. Prices are up, but it doesn’t mean that we can just put businesses on the market at ridiculous prices and expect them to sell. This is why it’s so important for sellers to partner with a knowledgeable business broker who will perform a full recast and valuation of their business, referencing actual sold comparables to come to their final estimation of market value. Getting the recast and seller’s discretionary earnings correct is the first step, and then once we have that number as accurate as we can possibly get it, then we would apply the industry multiplier, driven from comparable sold businesses. Using the multipliers that buyers actually paid for comparable businesses will be the best indicator of market value and give your business the best chance to sell as quickly as possible. Notice here we aren’t saying that you should offer your business up at a discounted price to get it sold, we are suggesting that getting the right price, a price that is driven by market data is the absolute key.
How “salable” your business is will help determine how long it stays on the market and contribute to the overall time it takes to sell. Some businesses on the market will sit there forever and never sell, no matter how much their price is deeply discounted. This is where the salability of your business comes in. What is desirable to a buyer really matters because it separates the businesses that sell from the ones who never do. It is estimated that 25% of businesses on the market for sale at any given time will never ever sell. Sometimes it’s due to an unrealistic selling price that doesn’t match market values, and sometimes it’s a business that no buyers want. The best thing a business owner can do if they want to sell their business is to ensure that the business is salable and desirable to buyers. Here are three keys to salability that sellers need to keep in mind.
Attract a Wide Variety of Buyers vs Just One
Most buyers want to purchase a business that runs efficiently without the owner doing all of the day-to-day operations. In other words, businesses that are a “one man band” situation where the owner is the entire business are exponentially more difficult to sell than a business that has key employees in place, and the owner oversees or manages the running of the business. Buyers see those “one man band” businesses as purchasing a job, rather than purchasing an actual business. They are much harder to sell and their multiples will be much lower than a business who has employees and/or a management structure in place. Furthermore, it will generally take much longer to sell a single person business like that vs one that is running as a true business.
So, as much as possible, try to pull yourself out of the vital operations of the business, hire key employees to handle those things, and your focus should be on growing and running the company. That will be a huge factor in the salability, what price you will eventually be able to get, and how quickly it will sell. A business that a new owner can just jump into running is going to attract many more buyers, which will multiply your chances of selling. A business that will require a new owner to have the exact expertise, experience, training, even licensing as the current owner will take much longer to sell, as we will be swimming in a much smaller pool of buyers looking for the one exact match for the business.
The Numbers Need to Hold Up
Most business sale transactions that fall apart do so during the Due Diligence period. This is the buyer’s chance to verify all of the financials and operational information that you have provided in the listing about the business. There can’t be any skeletons in the closet or any ugly things that you are trying to hide. That’s why the cleaner you keep your books the better, because there is less room for the buyer to discover something that changes their mind about the deal. Being as upfront, honest, and transparent about your financial records and your past operations of the business will ensure that Due Diligence goes as smoothly as possible, and the buyer will hopefully only find evidence to support what’s been previously presented about the business.
How the Due Diligence process plays out determines whether a buyer will continue with the sale or if they will cancel their contract. If they cancel, you will have to go back to market, find another buyer, and start the process all over again. Obviously, starting over again would only add more and more time to the clock, so if your motivation is to sell your business as quickly as possible, make sure your books are clean, make sure the information you are presenting to your business broker and to potential buyers is 100% correct, and prepare for Due Diligence in advance as much as possible, by having all of your financial and operational info ready to go.
Document, Document, Document
Another big factor to salability is documentation. Buyers want to purchase businesses that are organized and are operating efficiently. Constantly we get buyers asking us “does the business have written contracts with clients or accounts?” That is among the top 5 questions a buyer will ask. They want to make sure that the clients or customers will continue after the sale of the business. They also want to make sure that those contracts are transferrable to new ownership, so make sure you have something like an assignability or transfer of ownership clause in your contracts too. For assistance with what your written contracts should look like, please consult an attorney who is knowledgeable with business contracts. Today more than ever, written employee contracts are important to buyers as well, so make sure your employees have contracts, where appropriate. Even though employees aren’t business assets, a business buyer will want to be given some sort of reassurance that the employees will stay with the business after a change in ownership, and a contract offers some comfort there.
Another thing that buyer wants is to know is that the processes and procedures of the business are documented. Do you have all of the key information on exactly how to run the business, how employee responsibilities are carried out step by step? If not, it’s time to start working on getting all of that written out and documented. It’s the nuts and bolts of what the buyer is purchasing, and it is the literal guidebook for them once they take over the business. Having documented processes and procedures will not only help your business run smoother now when you hire on a new employee, for example, but it will make your business much more attractive to buyers.