Looking to sell your small business? Watch out for these things and you’ll likely get a better price
The median age of the typical small business owner is over 50, and as the population — particularly baby boomers — gets older, there’s been more interest in cashing out and hitting the golf course.
It's still a strong market for business owners looking to exit.
According to a recently released report from BizBuySell, a popular online marketplace for buyers and sellers of companies, the number of firms that were sold during the first quarter of the year continued to remain at historically high levels even after falling slightly from the corresponding period in the previous year. The takeaway is that more business owners than ever are looking to exit.
The reasons are many. Interest rates are still relatively low and financing is readily available. Washington politics, international trade fears, and stock market volatility have been motivating many to sink their savings into more stable and controllable investments. The tax environment — particularly capital gains taxes — remains business friendly. Many small businesses are showing profits that make them attractive to potential buyers.
But most important, the demographics are changing. More millennials are looking to get into business ownership at the same time that business owners are getting older. Studies show that the median age of the typical small business owner is over 50, and as the population — particularly baby boomers — gets older, there’s been more interest in cashing out and hitting the golf course.
“As an owner, this represents an opportune time to exit, especially for retirement-seeking baby boomers,” said Adam Debussy, a senior marketing manager at BizBuySell. “Those owners can capitalize on the high tide, rather than risk entering and having to hold through another recession or having to sell for less than they can today.”
Debussy believes that the current market fundamentals remain strong and will continue to attract more people looking to buy companies as they capitalize on the healthy, baby boomer-fueled inventory of financially appealing businesses.
That’s good news for sellers, right? Well, maybe not for all. Even in this strong environment, many owners are finding themselves selling their businesses for much less than they thought. Why?
“The biggest mistake owners make is not thinking ahead,” said Michael Lefkowitz, a founder and managing partner of Benjamin Ross Group, a business brokerage based in Southampton, Bucks County. “Many owners do not plan for the sale of their business and then the unexpected happens, such as death, divorce, partnership issues, illness, etc. Then the owner is placed into a situation that they have to sell not on their terms and end up leaving significant money on the table.”
Lefkowitz, who has also authored a book on selling a business, says that business owners should start planning for the sale of their companies from the moment they start or purchase it. He believes that too many people run their businesses like a job where they're no more than just a technician or a salesperson, instead of building an organization and creating a long-term asset.
“If a business owner wants to make their business attractive for sale at the highest price the market will bear, the owner’s role has to be relatively easy to transfer,” he says. “He or she has to work on the business and not in the business.”
That means building an infrastructure that be easily passed on to a third party. It means keeping detailed documentation, clean files and books and records dating back at least three years to show to a prospective buyer. It means polishing up your logo and cleaning up your databases as well as stepping up your social media presence and website. It requires that you have an existing buyout agreement in place to minimize potential disputes with your partners.
It also means figuring out why your company would be valuable to a potential buyer. Do you have a great team of employees? A key location? A unique technology or intellectual property? Maybe your business is run more profitably than your competition, or has an already established and trustworthy brand. These are the things that prospective buyers will want to know in order to determine whether your business fits in with their longer term strategy.
"While reviewing your value, you will likely uncover a few holes or areas that could use touching up," Debussy says. "Take the time to do so, and you will find yourself in a much better position at the bargaining table."
Debussy’s advice is indicative of the data.
The BizBuySell report found that the median sales price of sold businesses dropped 8.2 percent from the first quarter of 2018 even though the median asking price rose 4.6 percent. The average number of days a small business is on the market before it's sold also rose 6.3 percent to 185 days from 174 days last year.
All of this points to business owners believing that the strong economy will be reflected in a higher selling price for their companies even though the market is more competitive than ever and buyers are becoming more particular.
Partnering with a good broker is also critical. Many of my clients resist doing this because they don’t want to pay the commission, which can range between 8 to 12 percent of the selling price and often requires a minimum fee. But by not hiring a broker, they’re likely hurting themselves in the long run. A good broker will have the experience to recognize a seller’s strengths and match that owner with the best buyer possible. They buy and sell businesses for a living and let’s face it: You and I don’t.
“I tried selling the company on my own for five years without luck,” said John DiSantis who formerly owned First Look Display in Bensalem, Bucks County, before selling it last year. “Using a broker was crucial in securing a quick buyer and ultimately closing on the business.” DiSantis gladly paid the additional fees because for him the means certainly justified the end.
“I thought retirement would be great,” he said. “Well, it’s 1,000 times better than I could have imagined!”
Gene Marks is a certified public accountant and the owner of Marks Group, a technology and financial management consulting firm in Bala Cynwyd.