1. The price is right. Business buyers are looking for profitable businesses that are priced reasonably. A highly priced business will take a lot more time to sell and will sell generally for a lower price (not higher) than if it was priced right from the first time.
2. The general state of the economy: in prosperous times, buyers’ sentiment is positive and risk taking appetite is big. Businesses generally sell is much shorter times. An average time of 6 months is generally sufficient.
3. The seller’s emotional readiness: Sellers’ Remorse is one of the biggest deal killers in Canada. An unready seller that puts his/her business for sale in the market has a very hard time making a decision about an offer. They generally end-up frustrating the buyer, loosing the offer and even losing credibility in the marketplace. The seller would need the help of a very experienced business broker to get serious buyers back on the negotiating table and close a new deal in a reasonable time. This might take years.
4. Luck: sometimes the first potential buyer ends up being the right one. The business can sell in only a few weeks. The seller needs however to be alert and recognize that a reasonable offer from a first buyer could be a great opportunity that should not be missed. A large number of sellers interpret a quick offer from a first buyer as an indication that the business is low priced. This cannot be further from the truth, especially if the business has been professionally priced.
5. The business is “sexy”: some industries are simply more attractive to buyers.  This does not mean that they represent better opportunities. It simply means that they are trendy. For example, Import and distribution businesses are in big demand at this time and generally sell for higher multiples and in shorter time periods.
6. The seller is very honest with the broker and/or buyers about the good the bad and the ugly of his/her business. Brokers collect information from sellers and present them to potential buyers. When information is unclear or misleading, brokers loose faith in the seller and the business. Brokers will then take more time to understand the intricacies of the business and find the right buyer for it. On the other side, buyers ask many questions about the business. Most buyers will back off if information is conflicting.
7. Betting on the wrong buyer. Some sellers are so desperate to sell their businesses that they accept offers from non qualified buyers knowing in advance that these buyers will fail if they buy the business. This is a big mistake as these buyers at one time or another will discover that the business is not for them. All the time spent with these buyers is scarified, The business has been out of the market during that time. Worse, new buyers start wondering if there is anything wrong with the business. Why didn’t that buyer buy it?

These are some of the reasons that will influence the time it will take to sell a business. In the current state of the economy, it generally takes the average business seller between 6 months and 2 years to find the right buyer. Good Luck!

There are quite a few implications for business owners who have a good reason to sell their companies and need an exit in a reasonable time. The business owner needs to prepare his/her business quite in advance for an exit. These are some of the preparations that would dramatically increase the chances of selling the business at a reasonable price without having to spend years waiting for the perfect buyer:

• Seek professional advice from experienced business brokers, accountants and lawyers a few years before listing the business in order to prepare the business for the sale.
• Make your business more efficient buy reducing redundant costs.
• Sell unproductive equipment. This will not affect the value of the business but will certainly increase the total proceeds from the sale.
• Optimize your stock and sell any surplus before listing the business. Excess stock requires that the buyer invests more money for the same business without increasing profitability. It’s much easier to find a buyer for a business that has a smaller stock.
• Create documented processes and procedures for your business so that the less skilled employees can still be hired and manage the business. This will not only reduce the operating costs of the business but will make it easier to find a buyer with the right qualifications for the business. Buyers don’t like to depend on highly skilled employees and offer lower prices for employee dependent businesses.
• Hire an Internet capable business broker at the time of selling your business. The Internet became the first medium to reach business buyers. Furthermore, the Internet will bring buyers form large cities as well as new immigrant from other countries who don’t mind settling in a remote area if they can make a good living from the business.
• Finally, be patient. Selling a business located in a remote area will take time, so patience is a virtue.

While challenging, selling a business outside large cities in Ontario is not impossible  but needs discipline,  preparation and patience. The few guidelines we have provided will produce great results if followed diligently.

• Because of the larger amounts of money involved in the purchase of a middle market business, the number of potential buyers is generally much smaller. Middle market transactions generally require various types of financing and are as a result very dependent on lenders. The credit crunch that characterizes the current economic climate has dramatically reduced the sources of financing for middle market transactions and therefore reduced the number of transactions.
• Private equity groups investing in middle market businesses have now a serious advantage over individual purchasers because they have large amounts of equity to invest and generally do not need financing.
• Middle Market companies have a larger number of employees than smaller businesses and are consequently less dependent on their owners. This reduces the transition risks for potential buyers and as a result increases the business valuation. Middle market companies sell generally for larger multiples than smaller businesses.
• Middle market business buyers are very analytical and require detailed and accurate financial information before making a decision to purchase.
• Middle market transactions are also more complicated and require help from professionals such as business brokers, accountants, experienced business lawyers, tax experts etc.

Middle market business owners looking for an exit strategy should definitively seek professional help to assist them in their transactions. Potential buyers have to be screened for financial capacity, business experience and management capabilities. Sellers should hire professional appraisers to value their businesses before putting  them in the market. Sellers have to prepare their businesses for sale by improving their accounting practices and restructuring their businesses to make their businesses less dependent on them and more transferable to potential buyers.

When interviewing potential business sellers before listing their businesses for sale, I spend a lot of time and attention understanding their real motivation for selling their companies. A seller with fuzzy reasons will rarely have the patience to go through the whole process and complete a deal. Having a good reason for selling ,while necessary, is certainly not enough. The other key ingredient is the persistence. I occasionally run into sellers who get discouraged after the first unsuccessful attempt and abandon the whole idea of selling.

The rapid swings in sellers’ emotional state is one of the reasons reducing their persistence when trying to sell. Sellers generally identify with their businesses and tend to confuse buyers’ objections about the business with personal attacks against them that they have hard time handling. Sellers feel such a pain and unfairness that the whole idea of selling becomes insurmountable. A good business broker understands the emotional states of business sellers and warns them in advance about their emotions before listing the business. A prepared seller recognizes his/her emotional swings when they happen and deals with them accordingly.

I generally advise sellers not to rely too much on potential buyers’ preliminary excitement about the business. While the initial buyers’ excitement can be a real engine to push toward a deal it also could be an unrealistic dream that will never happen. In order to increase the likelihood of having a deal, the broker and/or seller should deal with as many buyers as possible and not rely on promises.

After a serious buyer makes an acceptable offer, the seller and broker need to make a tough decision. Is this buyer worth focusing on? Should we work with him/her on an exclusive basis? There is generally no sure answer to these questions. A decision needs to be made quickly. If the decision is yes, then the seller should put all his/her efforts to help the buyer with the due diligence.

It is frequent that the chosen buyer ends-up not being the right one. In this case the seller and broker must move-on and start the process again with no hard feelings!

1. Interest rates are currently historically low. Business valuations are very sensitive to interest rates just like any other capital assets. Lower interest rates increase affordability and increase demand for businesses. Supply of businesses for sale on the other side decreases because some business buyers will be attracted to the higher return debt markets. There is a consensus that interest rates might increase in the near future, which makes today a real opportunity for business sellers.

2. A large number of unemployed skilled workers are looking for job replacement opportunities. The number of corporate layoffs has risen dramatically in the US and Canada in the previous few months. Laid-off employees have hard time finding decent jobs in today’s economy. A large number of these unemployed capable workers are now looking for businesses to buy.

3. Baby Boomers are getting closer to the retirement age. Baby Boomers who own businesses are starting to retire in large numbers. The number of businesses that will be sold for retirement reasons will rise dramatically in the next 10 years. This will increase the supply of businesses for sale and might depress the market in the near future. Selling in today’s market will enable sellers to avoid a probable depressed future market .

4. In the province of Ontario, Canada the Capital Gain Tax Exemption has been raised to $750,000.00 per shareholder for the sale of company shares. This is a huge tax incentive for today’s business sellers . This might not last for long as governments in North America might increase the historically low capital gain tax rates to balance their huge deficits created during this financial crisis.

5. The economy is expected to recover from recession. Most experts agree that the economy is on its way to recovery. This has recently fueled the business for sale market as potential buyers are feeling more optimistic about future economic prospects. Some business sellers are waiting for a full economic recovery to get the best possible price for their businesses but this is a rarely good strategy for two simple reasons. First, other not so favorable factors will kick-in in the future and second the recovery might take much longer than expected.

6. Supply of viable businesses available for sale is now very low. A large number of business sellers were scared of the negative impact of recession on their business sale prices. As a result, many potential sellers are now on the sides waiting for the economy to recover before putting up their businesses for sale. This is defectively an opportunity for new sellers to jump in.

While there is no exact science that can predict future market behavior, business owners in the US and Canada looking to sell their businesses should consider the above factors before delaying the sale of their companies even further and miss today’s market opportunity.

Due diligence is the process by which potential buyers who have expressed a serious interest in the business (after submitting a letter of intent or a conditional offer) verify that the business is truly what they believe it to be.  With such a broad definition, its is understandable that business sellers don’t really know what to expect. The process is not standard and changes dramatically depending on the type of buyer, the industry, the size of the business etc.

In general terms the more sophisticated the buyer, the longer and deeper the due diligence. Large transactions, especially share purchase transactions require more sophisticated due diligence. Also, the more knowledge about the business the buyer has before signing a letter of intent or conditional offer the shorter the due diligence period. Whether the business seller (or Broker) should only accept a letter of intent from buyers who already have received extensive information about the business is always a dilemma. On the one hand, giving away confidential business information to a large number of potential buyers who simply expressed an interest in the business is very risky as it increases the chances of this information ending-up in the wrong hands. On the other hand, committing to a letter of intent from a buyer with very little knowledge about the company increases the chances of a deal falling through. A deal falling through does generally not help when trying to sell the business to other potential buyers.

Despite all the uncertainty regarding the due diligence process, there are some principles that if applied correctly can smooth up the due diligence process and increase the chances of reaching a deal:

1. There should remain some flexibility in negotiation during due diligence: if negotiations are too tight, deals generally don’t make it through due diligence. Buyers or sellers accepting reluctantly unfair terms and conditions have all the time to change their minds during the due diligence and deals generally fall through. A deal should be win-win where both parties receive a lot of value and are willing to give up a little bit more to save the deal.
2. Sellers should be upfront about the good, bad and the ugly about the business. It’s mach better  for the seller to loose a buyer before signing the LOI rather than during due diligence so let the buyer know in advance what to expect. Furthermore, it’s almost impossible to hide an important fact about the business to a savvy buyer. In this case honesty does pay.
3. Understand the buyer’s hesitations and deal with them. It’s perfectly normal that buyers show suspicion during due diligence. It’s up to the seller to bring relevant facts and address buyers’ concerns. This suspicion is not personal and should not be interpreted as an accusation of dishonesty.  Buyers are committing huge amounts of capital and their whole future relies on the success of the transaction.
4. Good preparation: It’s advisable that sellers prepare a large portion of the documentation needed for due diligence before putting the business up for sale, especially financial and accounting information, stock, legal documentation etc.
5. Patience: It takes a lot of patience to sell a business and due diligence is one of the final steps. At this stage, sellers are generally exhausted and are vulnerable to emotional bursts.  It’s important to control your mood.

While my description of the due diligence process might seem too general and lacks specifics about the types of documentation needed, my experience as a Business Broker in Toronto, Ontario has taught me that applying these principles is a key factor is to reaching a successful deal.

In our previous post we explained the work involved in selling a business and if it makes sens for the seller to do it on his/her own. The time,  effort and money spent by the average seller trying to sell their business is rarely worth it. If you add to that the possible mistakes that a seller can make when trying to sell on their own and the high cost of these mistakes, the decision to hire a professional is almost obvious.

Of course, in some rare cases, sellers should definitely learn as much about business sale process and do it on their own. These circumstances include extremely unique businesses that only a small number of potential buyers could acquire and the sellers already knows about them. In such rare circumstances, sellers would be better served by themselves because they can focus on these rare potential buyers and make a deal happen.

In most other circumstances, a competent business broker will add a lot of value to the transaction, much more that the fees he/she charges.

Business Brokers will save you time so you can keep focusing on your business and keeping it in a good salable shape while the broker is marketing the business. They will protect your confidentiality and save you from the harm that a confidentiality breach can cause to your business. Business brokers also expose your business to a much wider audience so you have qualified leads to choose from. You can then sell to the buyer who represents the best fit for your business and has the higher likelihood of making it successful. Such a buyer will recognize the potential and would pay  the highest possible price. Business brokers also create competition between buyers increasing the chances of obtaining the highest possible price from the market. The linked article about business brokers summarizes business brokers’ involvement in the sale of a business and the advantages of working with a licensed broker for business sellers and buyers in Ontario, Canada.

How to choose a business broker?

The most important criteria to look for when choosing a business broker are:

• Honesty: when selling a business it is extremely difficult to fool people by over-embellishing or misrepresenting your business to them. They will discover the truth sooner or later and you will have wasted your time and money. Honest business brokers are much more successful because they earn buyers’ trust and can sell them businesses.
• Professionalism: professional brokers attract serious buyers and protect sellers’ confidentiality. You can identify the level of professionalism after a brief interview with the broker.
• Personality fit with the broker: the broker seller relationship has a large impact on a successful sale. Brokers have to believe in the business and in the integrity if their seller to be able to sell the business.  I personally cannot sell a business if I don’t trust the seller!
• Marketing capabilities: Selling a business requires a wide exposure to potential buyers. The broker needs to have a successful marketing system to generate leads.
• Knowledge and experience: business brokerage requires specific skills in finance, sales, marketing and strategy to be able to explain the intricacies of the business to buyers.
• Interpersonal skills and energy level: Brokers talk to more than 50 potential buyers before finding the right buyer for the business. Successful brokers enjoy talking to people and are enjoyable to work with. Their level of energy is so high that they can create  enthusiasm in buyers’ minds and give them confidence to make the difficult decision to buy a business.

If you are a business seller and you have found a broker that has all these qualities, then you have found the right person to sell your business and you would probably be better off working with that broker.

What is involved in the sale of my business? – what is the process?

• Understand what makes my business unique, how profitable it is and what prospects are for the future.
• Analyze my  financial statements and identify trends.
• Adjust the profit figures to reflect the real profits of my business
• Determine a range for the asking price for my business.
• Write an attractive ad and post it in more than 10 business for sale websites  (it would cost a business owner about $500/months to pay for the ads)
• Call people who inquired about the business, interview them and make appointments with them without divulging specific information about the business -  keeping confidentiality is the key to a successful sale
• Meet with interested people and verify that they are ready, willing and able to buy a business.
• Have the qualified buyers read, understand and sign a comprehensive confidentiality agreement and provide a copy of their ID’s
• Provide buyers with selected business information and explain it to them.
• Help buyers think thoroughly on what they really want to do and whether the offered business really fulfills their needs.
• Understand buyers circumstances and solved  any miss communication problems that might occur.
• Follow up with buyers and explain them how the offer process works.
• Explain all the intricacies of the offer and make a decision about offers.
• Understand the due diligence process and go through it with the minimum risk.
• Help the buyer decide about the outcome of the due diligence.
• Have the buyer sign the forms to firm up the deal.
• Cooperate with the lawyers for an legal maters.

As a business owner, can I reasonable sell my business myself?

Yes everything is possible if we pay the price but is it really worth it? Following the steps described above is extremely time consuming, especially for somebody who is doing it for the first time. This is what might or will happen:

• As when we want to learn new things, we make mistakes in the beginning. Can you afford to make mistakes on the sale of your business? Possible mistakes include, giving your sensitive information to the wrong hands, focusing too much on the sale and letting your business deteriorate to the point where it’s not sellable anymore, spending a lot of time and money on lawyers and accountants with buyers who are not real buyers.. and the list of possible costly mistake goes on and on.
• Becoming frustrated and abandoning the sale of the for lack of help. The sale of a business is very emotionally draining. With no help, very few people can handle the ups and downs. Most people give up on the whole idea after a short trial period.
• being taken advantage of by dishonest fake buyers. The best way to learn about a particular business is to pretend that you are a potential buyer and get as much information as possible about it. Business owners find themselves spending tremendous time and money to teach their future competitors how to do business. This is so unfair!

What if I have already a buyer I am working with, should I drop him/her and look for a broker to sell my business? if your buyer seems serious and has already spent money and efforts on the purchase of your business, you should work with him. You might hire a broker who will continue to market the business so that your buyer feels pressure from other competitive buyers and take less time to make his/her decision to buy and/or offer a higher price. You could also focus on that buyer and only hire a broker if it doesn’t work out. Most importantly, you should be firm with buyers and refuse to be at their mercy and give away what ever they require. Unreasonable requests are requests that could harm your business should the buyer not complete the transaction. Such requests include divulging trade secrets, customer lists etc..

There are however some circumstance where you might do a good job selling your business yourself. These are a few examples:

If your business is so unique that only a few potential buyers can acquire it. For example, the business requires some specific skills that only a few specialized companies/individuals have and you know who they are. In this specific case you might be better-off contacting this short list of potential buyers and negotiating with them directly. Of course professional help is always a plus.

Assessing the value of a business is often a combination of financial calculations and personal judgment based on the evaluator experience of similar transactions and a variety of adjustments to reflect differences in business models, environment, regulations, markets etc.

A small business is only worth what somebody is willing to pay for it. That introduces the notion of the value to the buyer as opposed to the intrinsic value of the business. Potential buyers who can see some synergies with the business will probably pay more for the business. Examples of synergies include cost reduction due to increased economies of scale, access to distribution channels enabling cross selling, access to new technologies, access to valuable brands etc.

Unfortunately the assessment of the synergistic value has always been extremely uncertain. Various acquisitions turned into financial disasters simply because most of the expected synergies never materialized. Research have shown that in large corporations, most of the enthusiasm for large acquisitions is mostly driven by executives seeking more power.   The larger the corporation, the larger the power of executives and their pay.

In the small business arena, most valuations are based on the companies history of profits not on the possible synergies. This is mostly because small business buyers are conscious of the high uncertainty in the small business environment. Why would somebody pay for the potential the the business might have. Small business buyers buy a business because of its potential but they only pay for its past results.

However, this doesn’t mean that a business with a bright history but a bleak future will still sell based on its history. The future is still the principal element buyers use in their decision to purchase a company.

Valuing a business before deciding to sell it is certainly a good decision. However, a business seller should understand the various limitations of business valuation and should remain flexible to the market reaction to his listing.

Three unique aspects make selling a business in Toronto much easier and more lucrative than in most other cities in North America:

• Ethnic diversity of its population: Diversity is good for business and can make markets much more liquid (frequent transactions). Different ethnic populations have different perceptions of happiness and different needs, so a business that doesn’t fit with people from a particular ethnic background might be an excellent fit for another ethnic background. For example gas stations and convenience stores require long hours of work and provide a relatively low return on investments. In spite of these disadvantage, these businesses are in great demand especially from recent immigrants. A number of recent immigrants lack language skills to operate a business with high social interaction so they perceive this type of businesses as ideal. Moreover the lack of job opportunities leave them with few other options. And finally sometime larger families provide buyers with a cost effective labour advantage.

• Immigration: Canada is one of the very few countries that is very open to immigration. One of the possible options for new immigrants is the purchase of a business that employs Canadian residents. This option is however underused since most immigrants use other options available. Moreover, immigrant coming to Canada are more entrepreneurial  by nature (otherwise they would not have risked everything they have to come to Canada). Very frequently, they choose to buy a business quickly after realizing that their future as employees might not be as bright as they expected.

• Concentration of population: A large market is generally more liquid than a smaller one. The number of business owners desiring to sell and potential individuals and/or companies looking to buy increase the possibilities of matching buyers’ and sellers’ needs.  As a good analogy, finance professionals know that large capitalization (total company value in the stock market) companies  have more liquid stocks than small capitalization companies.

For all these reasons, it’s mach easier to sell a business that is located in Toronto than a business in a small town in North America. Furthermore, even business valuations are higher in Toronto. Liquidity increases price. A buyer will offer a higher price if he/ she knows that it will be easier to sell the business if it ends-up been not what they expected it to be.

Unfortunately, not all business sellers take advantage of  the Toronto advantage when they sell their businesses. If the business is not exposed to the market for a reasonable time with adequate advertising then it will not sell for the best possible price. unfortunately, business owners selling with no professional help end-up leaving a lot of value on the table.