Selling a business can be a complex and challenging process, and one of the most common frustrations for private business owners is not receiving the offering price for their business. Despite putting in years of hard work and building up their business, many owners find that they must settle for a lower price than they were hoping for. Here are some of the reasons why this is the case:
1. Overestimating the Value of the Business: One of the primary reasons why private business owners seldom get the offering price for their business is that they may overestimate its value. It's natural for business owners to have an emotional attachment to their business and to believe that it's worth more than it actually is. However, buyers are often more objective and may not see the same value in the business. Additionally, the current market conditions and economic factors can also play a role in determining the value of a business.
2. Failure to Properly Prepare for Sale: Another common reason why private business owners don't get the offering price for their business is that they fail to properly prepare for the sale. Selling a business is a complex process that requires careful planning and preparation, and owners who don't take the time to get their business in order may not receive the full value for it. This can include a lack of financial records, poor business practices, or a lack of planning for the future.
3. Timing of the Sale: The timing of the sale can also play a role in determining the offering price of a business. If the economy is in a downturn or the industry is facing challenges, buyers may be hesitant to pay top dollar for a business. On the other hand, if the market is strong and there is a high demand for businesses in the industry, owners may be able to command a higher price.
4. Inadequate Marketing: The marketing of the business can also impact the offering price. If the business is not properly marketed to potential buyers, it may not receive the attention it deserves. This can result in fewer offers and lower offers overall. It's important to work with a broker or advisor who has experience in marketing and selling businesses to ensure that the business receives maximum exposure.
5. Buyer-Seller Mismatch: Sometimes, the buyer and seller simply don't see eye-to-eye on the value of the business. The buyer may have a different perspective on the potential for growth or may have concerns about the business that the seller is not aware of. This can lead to a mismatch in expectations and result in a lower offering price.
6. Financing Issues: Finally, financing issues can also impact the offering price of a business. If the buyer is unable to secure financing for the full amount, they may be forced to offer a lower price. This can be frustrating for the seller, who may have been counting on a certain price to finance their retirement or future plans.
While private business owners may not always get the offering price they were hoping for, there are steps they can take to maximize the value of their business. By properly preparing for the sale, timing the sale appropriately, and working with experienced professionals, owners can increase their chances of receiving a fair price for their business.
Here are some best practices a business owner can use to prepare their private business for a successful sale to a third party:
a. Get Your Financial House in Order: One of the most important steps in preparing a business for sale is getting your financial house in order. This means having clean and accurate financial records that are up-to-date and organized. This includes balance sheets, profit and loss statements, and tax returns. Prospective buyers will want to see these records, so it's important to make sure they are in order before the sale process begins.
b. Identify and Address Potential Issues: In addition to getting your financial records in order, it's also important to identify and address any potential issues that could arise during the sale process. This can include legal issues, outstanding debts, or concerns about the business's operations. It's important to address these issues upfront to avoid surprises during the sale process.
c. Prepare a Business/Strategic Plan: A business plan is a key tool for preparing a business for sale. It provides prospective buyers with a clear understanding of the business's operations, financials, and future potential. A well-prepared business plan can also help the owner better understand the strengths and weaknesses of their business and identify potential areas for improvement.
d. Conduct a Valuation: A proper valuation of the business is essential to understanding its worth and setting a fair price. A valuation can be done by a professional appraiser or business broker who has experience in valuing businesses in the same industry. This will provide a realistic estimate of the business's worth and help the owner set an appropriate asking price.
e. Build a Strong Management Team: Prospective buyers will want to see that the business has a strong management team in place. This means having key employees who are trained and experienced in their roles and can continue to run the business after the sale. Building a strong management team will also make the business more attractive to buyers and help to ensure a smooth transition.
f. Maintain Confidentiality: It's important to maintain confidentiality throughout the sale process to avoid any negative impact on the business. This means only sharing information with prospective buyers who have signed a non-disclosure agreement and keeping the sale process confidential from employees and customers until the sale is finalized.
g. Consider Hiring an Exit Planning Advisor: Selling a business can be a complex and time-consuming process. Hiring an exit planning advisor with experience in preparing businesses for sale can help to streamline the process and ensure that the business is set up for a successful exit. Exit Planners bring a unique perspective and framework for getting a business ready for a sale that ensures higher levels of success as they understand what buyers are looking for and what makes a business more attractive for a sale.
Preparing a private business for sale to a third party requires careful planning and execution. By getting your financial house in order, identifying, and addressing potential issues, preparing a business/strategic plan, conducting a valuation, building a strong management team, maintaining confidentiality, and considering hiring an exit planning advisor, owners can increase their chances of a successful sale. It's important to remember that selling a business can be a complex process, but with proper preparation and execution, it can be a rewarding, can create additional value and result in a more profitable sale.