The business acquisition space has always made headlines in the media, and for good reason. Deals that make the news – particularly deals for large companies or fast-growing tech darlings – are interesting and awe-inspiring. In the small business market, things are a bit different. Here are some common misconceptions we encountered as we began navigating this market. While there are plenty of buyer misconceptions as well, we’ve focused on sellers for the purposes of this guide.
Misconception #1 – If I have a good business it will be easy and fast to sell once I make the decision to move forward.
While this may be true in some situations, it typically isn’t. The fact is, selling a small business is a difficult and lengthy process. The average business takes 7 to 12 months to sell and will go through several rounds of buyers before a transaction closes. The process can take even longer for a number of reasons including (among others): unrealistic price expectations, poor marketing, declining financials, or an owner not willing to do the work required to sell. At ValueStreet we regularly encounter perfectly good businesses that have been on the market for years for one reason or another.
Misconception #2 – My buddy got $2 million for his business, and my business is better. I should get at least $3 million.
As we will discuss in the next chapter (“The landscape for small businesses”), the market for your business is an ever-changing and dynamic one. Your friend’s business might have sold during a roaring market or the buyer might have overpaid significantly. On the other hand, it’s also entirely possible that you’ll get the price you want. The broader point to appreciate, though, is that the value of your business will be set by the market when you go to sell it, which is why planning and reasonable expectations are paramount.
Misconception #3 – Price is the most important thing the buyer and I will have to agree on.
Price is without a doubt one of the most important items you and the seller will need to negotiate. But it’s not everything. There are dozens of other terms that you will need to hash out to close a deal and many of them might change how you or the seller think about price. We will cover many of the important terms that surround a transaction in a later chapter of this guide.
Misconception #4 – If I hire a broker the sale process will be much easier for me.
This is a common misconception. While hiring a broker will make certain things easier (as our Brokerage chapter will show), most of the responsibility for the sale will still fall on your shoulders. Brokers can do many things, but you’ll still have to field dozens of phone calls, meet potential buyers regularly, produce and organize your business’s documents, meet with attorneys and CPAs, be on call during diligence to answer questions, then likely train and transition a new buyer into your business. All of this has to happen while ensuring that your business continues to perform lest the buyer (or the next buyer) could lose interest.
Misconception #5 – When the time comes, I’ll just sell to a family member or one of my employees. They’ve expressed interest before.
Often, this is possible. Sometimes, however, a business gets too big (expensive) for one employee or family member to buy, or when the time comes, the individual you have in mind has a change of heart.
It’s a lot of risk to acquire a business. For many employees, doing so would require the use of significant debt – something that makes many people uncomfortable. Partnering with your employee and a firm like ValueStreet could be a good option in these situations.
If you have a larger group of employees who are all interested in buying your business, an ESOP (Employee Stock Option Plan) could be a good option to pursue. This is beyond the scope of this guide, but any good employment attorney should be able to help you set one up if you decide it fits your needs.
Misconception #6 – Once the transaction closes I’ll be able to sail off into the sunset.
This is only partially true. Nearly every small business transaction contains some form of ‘escrow hold back’ for 12 to 18 months after your business sells. This means that although you have completed the sale, 10-20% of the proceeds will typically sit with a third-party escrow service for a year or more to protect the buyer in case any material facts about your business change or appear to have been misrepresented. Many sellers are unaware of this is industry-standard feature of acquisition transactions.
In addition, most sellers commit to work in the business for months or even years as part of a transaction to get the buyer comfortable enough to assume the risk of an acquisition. For this reason and others, it is important for sellers to plan ahead and bring their business to market while they still have the energy to work in it for a while. If you’re in a situation where you can’t work in the business any longer to facilitate a transition, understand this may change the selling price due to the increased perceived risk for the buyer.
Selling Your Small Business: The Most Important Truth
While it’s helpful to wrap your head around some of these misconceptions, it’s also helpful to remember what’s true in nearly every transaction: both you and the buyer are venturing into unknown territory together. No buyer has seen everything, and no seller will perfectly understand every facet of the sale.
Both a buyer’s and seller’s willingness to be reasonable, be available, and take risk alongside one another will be the ultimate determinant in whether a business is sold. There is no magic formula here and parties that aren’t ready to make that commitment face long odds.
Up next, we’ll consider the landscape for small businesses in general and how it will impact your journey as a seller.