In today’s competitive business sales market, if your business listing has been on the market for months, and hasn’t received an offer yet, don’t panic. Business sales are very different from something like real estate sales, where the most buyer activity happens in the first few weeks. In 2020, the average days on the market for a sold business in Florida was 315 days. So, more than 10 months is the average sales cycle that we typically see. Also, in many cases, there really is just one perfect buyer out there for your particular business, so sometimes we do just have to wait for them to come along. However, if your business listing isn’t getting any buyer inquires at all, and it’s been on the market for several months, that is something to look deeper into. In a market where we are experiencing an uptick in buyer activity of about 150% as compared to the same time last year, a good business listing should be inundated with interest and buyer inquiries. If your listing isn’t getting any buyer love, it’s a good idea to talk to your business broker about why he or she thinks that is, and brainstorm ideas on what to do to fix it. Here we will discuss the main reasons why a business listing might not be getting as much attention as others on the market.
Historically, the number one reason that a business doesn’t sell is because the asking price is too high. Buyers are looking for a good deal, and they are wanting to invest in a business that makes financial sense. If they can’t see the value in your asking price at first glance, they will keep scrolling and never click on your listing to request more information. This is why it’s so important to get the asking price right from the very beginning, so that we can generate as much buyer interest as possible. Today’s buyer is going to be very discerning about where they spend their hard-earned money, and the owner benefit of the business they are considering has to relate to the asking price in a realistic way. Overpriced businesses rarely get a second look. The general buyer perception is that most business listings are overpriced, so we have to make sure that prospective buyers can see value immediately. Small businesses should be priced on an industry multiple that is derived from sold comparable businesses with a similar owner benefit. If we can easily show that, then buyers will see the value in the asking price. With such a huge buyer pool out there shopping, we want to get as many eyes on your listing as possible and getting the price right is the number one way to do that.
Good Financial Records
A buyer is purchasing a business based on its owner benefit. The way that a seller proves their owner benefit will be critical, not only in generating buyer interest, but also in standing up to the test during the buyer’s Due Diligence. If you were a buyer, would you just take the seller’s word for it that they made $300,000 last year? No, you wouldn’t…you would want to see proof of that. So, that’s why businesses that are priced based on their tax returns are going to be much more salable than a business that can only offer internal Profit and Loss Statements or even worse, “Owner to Prove,” which in our industry means that the owner cannot prove their financial claims with any real documentation, such as tax returns. Tax returns are the most preferred method of financial proof, because they are the most “official” document that a seller can provide.
Of course, a tax return doesn’t tell the whole financial picture of a business, because in order to find a business’s value, we perform a financial recast from the tax return. The owner’s salary, depreciation, amortization, interest, and any non-essential business expenses are added back to the bottom line to show the true owner benefit. These “add-backs”, as we call them, will also need to be provable. If a seller pays for all of his family members’ cell phone bills through the business, then of course, the new owner won’t have that as an expense, so it gets added back in. However, a buyer will want to see proof that the phone bill is paying for those personal family lines and isn’t actually an expense of the business. The rule with add-backs is if you can’t prove it, we can’t add it back.
So, our best piece of advice for sellers who are listing their business for sale is to limit those personal expenses coming out as business expenses. Clean up your books and run the true numbers so it is very easy for a buyer to see the real bottom line of income and expenses. Ideally, you will want to do this 1-3 years before listing your business for sale. However, if you are already listed for sale, it’s never too late to get things cleaned up and straightened out.
A small business is tough to sell at the right price in a good market. In fact, the statistic is that only 25% of businesses listed will ever sell; however, at Green & Co. our success rate is over triple that number, so we are able to sell most of the businesses we list. So, in addition to a realistic asking price that’s based on real financials and market data, the salability of a business will play a huge role in its ability to sell. Buyers are looking at factors like, are the owner and the business one and the same? Are there any trained employees or even better, is there a manager in place? Are there documented processes and procedures? Is the buyer looking at a true business or are they simply looking at purchasing a job? The more an owner of a business can take themselves out of the day-to-day necessary operations of a business, the more salable that business becomes. If the owner is a ‘one-man band,’ and they are doing all of the work in the business, on top of running the business, then that makes it very difficult to find a buyer with those exact skills, who wants to do that work, who has the money to purchase the business. That exact perfect buyer can be very tough to find. However, if the seller has built a true business, then it is more likely to attract a higher number of buyers, from different backgrounds with varying entrepreneurial skills. A business that a new owner can jump into and start running, but doesn’t necessarily have to deliver the services that the business offers, will be much more attractive to prospective buyers and it will be much easier to sell.
Is It Essential?
This phrase “essential businesses” has been forever etched in the business landscape. Before COVID, people would always ask me, “What kind of business should I buy?” My answer was always the same. “Something recession-resistant. A business that would not be devastated by a change in the economy.” Today, more and more business buyers are asking for “essential businesses” which is basically the same thing. A business that has remained open and has even seen an increase throughout 2020 is going to be in much higher buyer demand than a business that was partially closed or a business in an industry like hospitality, tourism, or entertainment that has been crippled. You will have a tougher time selling a business that is deemed as non-essential and has seen a downturn; however, it’s not impossible at the right price. After all, price should be based on current owner benefit. If there was no owner benefit in 2020, all is still not lost. The business might have equipment that is of value, and then we can simply find a buyer via an asset sale. Most of the industries that have been the hardest hit by COVID will bounce back, and savvy buyers realize that. If you have a business in a slower recovery sector, talk to your business broker about what strategy you should adopt to try and find a buyer.