How to sell your medium size business…without using a broker.

By Reed Sawyer

As a former business broker and investor, I know one thing as a fact.  Most business owners don’t know how to sell their business.  They don’t know how to prepare to sell it, and they don’t know how to maximize the price that they can expect.

1)       You must be prepared.  You need to have a minimum of 2 years tax returns.  If you don’t have them, you can’t sell your business…for the maximum price.

2)      You must maximize revenue. Have sales, have promotions, have seminars, in order to drive business to your doors, increase per head revenue, and maximize revenue.

3)      You must be prepared to be replaced.  If you are a one man shop, you don’t have a business to sell.  If you are managing several people, then you have a business, as long as you have a succession plan. If you don’t have an ongoing training program set up now, start one.  The sooner that you can train one of your employees to replace you, the sooner you can become an executive, and not just a worker. (And the sooner that you can sell your business.)

4)      You must realize that you are on a schedule.  If you make the sacrifices now, you will reap the rewards for the rest of your life.  That means that you must work extra hours, sacrifice on taking some money out of the business, and work harder and smarter for the next two years than you have ever worked before.

5)      Clean up.  A lot of business owners get so preoccupied in the process of running a business, that they forget to make sure that the exterior of the building is clean and inviting, and the bathrooms sparkle.

6)      Establish a price using E.B.I.D.T.A (Earnings Before Interest, Depreciation, Taxes, and Amortization)

 You Must be Prepared…with 2 years of tax returns.

If you are planning on selling your business, you must first prove what your business will support.  If you assume that you will require a 20% down payment for your business, your business must be able to support all of your expenses, PLUS a manager expense, PLUS a return on investment that will pay itself off in 5-15 years.  (If your business won’t support paying itself off in that amount of time, you will have to lower the price.

The only way to prove what your business will support is to have audited tax returns.  (Most people won’t OVER state their income, just to increase the sales price, although it has been done before.)

You must maximize revenue

You will have fixed costs, and variable costs.  Guess what?  You are paying rent or a mortgage for your business whether you are open until 5:00, or open until 10:00.  If you can keep your store open later, and bring in more business, it’s a great thing.  I had a dry cleaner.  I wanted to maximize profits, so I started doing restaurant linens.  I hired a kid to come in after I was closed, and he would work for four hours a night folding linen table cloths.  I realized that I could use my business not only during normal operating hours, but also beyond normal operating hours.  Can you hold special events, seminars, and have customer appreciation days to bring in people beyond the normal cycle of business?

I used to go to a great pizza shop that would give out preferred customer cards.  Every time that you bought a pizza they would punch your card.  Once you had ten punches, they gave you a free pizza.  Could you do that for your business?  What ways can you use to incentivize your workers?

You must be replaceable

If you are about to sell your business, you must plan on being replaceable.  Most business buyers don’t want to buy a job, they want to buy an income stream, a passive income stream.  If you are a one man shop, you don’t have a business to sell.  I have talked with numerous contractors that had a great book of business, and they were going to just shut their doors and walk away, because they were a one man shop.  If they had hired someone to be the manager, they could have grown their business, and made it a saleable commodity. 

Also, when you hire someone to be the manager, that frees you up to be the executive.  This means that, if your forte is selling, you can be a senior sales ambassador and bring in a lot of business, because you no longer have to worry about the day to day operations.  If you are more of a behind the scenes person, you can make the process run more smoothly.  Whatever your special skill, use it to grow the business revenue, so that you are ready to transfer the business to someone else. 

You are on a schedule

You must realize that if you do this correctly you have a schedule.  If you already have maximized revenue and have maxed out your earnings, and have two years of audited tax returns at the maximum level, you are ready to sell.  If you haven’t done that, start doing it right now.  You want to ramp up your revenues, and profits, and keep building.  If you are losing money, you don’t have an income stream to sell, but…you could transform your business, and turn it into a positive income stream generating business that is worth millions.

Sit down and concentrate on the things that you need to do, and map out a schedule for when you want to accomplish these items on the list.  If you start now, and grow your business revenue, and get a manager to replace you, and use your new independence to increase revenue and profits even more, you don’t HAVE to sell.  You are now in a position where you have the option of selling when you want.  You could even keep the business, and run it absentee.  This might involve transforming your key employees into being stockholders in the company, and giving them profit shares to incentivize them, but, hopefully, you have grown your business to the point where you can afford it. 

Can you afford NOT to offer profit sharing if you are an absentee owner?  Most people, if not given an incentive, will do the least amount possible from being fired that day.  When you incentivize employees to be more productive, they will be more productive. 

In summary, know your schedule, and keep moving forward.

Clean up!

Years ago, when I was a Disney trainer at Walt Disney World, Josh Sledge III took us trainers out to the front gates, and brought us in from the front of the park, we took the same monorails, waited in the same lines, and did everything exactly as the guests did.  He told us that most people become used to what’s around them, and they don’t see things through “fresh eyes”.  However a new customer driving up to your business will see the unswept sidewalk.  They will see the messy bathroom.  They will see the drink spill on the floor and they will have to decide if they even want to come inside…or keep driving. 

Clean up!

If your bathrooms are not sparkling, why not?  One of the easiest way to differentiate your business from others is to have an obsessive compulsion to have the cleanest bathrooms in your industry.  My family owned Blue Parrot Camping Park, in Lady Lake, and we prided ourselves on having the cleanest bathrooms in the state.  It took just a little more effort, but our campers appreciated it, and we had extremely loyal campers.

I had a customer once that asked me, “Reed, how can I get more yuppies like you to come into my restaurant?”  I paused for just a second and told him, “Well, David, one way to improve would be to avoid having complaints in the newspaper for health code violations for your restaurant.  That might be a good first step.”

If you have a business where people would use the restroom on a regular basis, making sure that it sparkles is a great way to create a differentiation between your business, and other businesses.

Establish a price

There are several methods that can be used to establish a price.  They are all, at best, estimates of the actual value of the business.  One of the best estimating tools is a multiple of E.B.I.T.D.A. 

Earnings Before Interest, Taxes, Depreciation, and Amortization.  If you are trying to sell a business, realize that the buyers will probably put down 20% of the purchase price for a down payment, and then will have to live off the income that the business generates.  If you price it too high, you will have received your 20% down payment, and that might be the last money that you get.  You want the business to succeed, not to be overpriced, and not able to make the mortgage payments. 

I once had a client that had purchased a country store business.  They didn’t want to work past 3:30 in the afternoon, and they were not particularly fond of keeping the place too clean.  They were especially offended when people asked them to do special favors, like giving them a full portion when they made sandwiches.  They paid their daughters to act as managers in the afternoon, and the daughters had the same work ethic as their parents.  They went bankrupt and lost the business. 

Why?  Because the buyers were lazy and didn’t want to work the business, but also because they were the wrong buyers.  Just because a person CAN pay you the down payment doesn’t mean that you should sell your business to them.  Always remember the hard work that it took to build your business up to this level.  Don’t sell it to someone that isn’t a hard worker, has a lot of money for the down payment, and realizes what it will take to run the business successfully.

When you use EBITDA, that is basically the income before the finance costs and taxes.  It is a much better measure for the price of the business than just one years gross revenue, or ten years profits.  It should be a multiple of EBITDA, depending, of course, upon the business.

How to sell your business without using a broker:

The first thing to remember when selling your business is to prepare it for sale.  Once it is ready to sell, and you can justify the price, now is when you should start looking for a buyer.  The first, and best choice, is to sell it to a competitor.  They are already established, they are successful, and they know how to run a business.  If they can pay cash, even better.  

If you can't sell it to a local competitor, look in your region for other businesses that might want to expand to your area.  (This is where it is especially helpful to have already established your succession plan and having managers in place.)  If you can show a business in your region how they could expand into your area, with a thriving business, it's a great fit.

If you can't sell it to a competitor in your region, could you sell it to a national company?  National companies are typically looking to do things their own way, with their own practices and methodology, but it is certainly a place to look.

The next place to look is to go to your trade journals, and see which businesses are doing well, and which are not doing well.  If you can get a list, in your area, and your region of businesses that are similar to yours, that is a good place to start.

The next place to search is from vendors in the industry.  They might not be a competitor, but it might be a good lateral move for them to expand into a business that is complimentary to yours.  If they are successful, it might even be a great fit.  (Again, this is where your management team becomes a valuable asset.)

You can advertise it in a trade journal, or paper, but don't give out the name, and make sure that you only deal with principals.  (A buyer, not a broker).  

If you are going to sell your business to a person that is not already in the industry, do your due diligence.  Spend time getting to know them.  Find out what successes they have had, what have their failures been?  What did they learn, and what are they going to do to succeed this time?  If a person has had a history of failures, and they do not learn from the past...don't sell to them.

If you are going to sell, on terms, to someone outside of your industry, plan on working with them for a month, minimum, before you finalize the contract.  They have to impress you.

Also, verify their deposit.  We were trying to sell our church one time, and we got a buyer for the church, whose only advantage was that they said that they had $100k in cash for a down payment.  I insisted upon a VOD  (Verification of Deposit), and we quickly learned that they had no money.  

I had a friend that tried to sell her bar to a young couple.  They kept on telling her that they had the money, but they were having some legal problems.  She let them take over the bar, and they stripped it, sold all of the food, kept all of the money, and didn't close.  She had to evict them, and lost thousands of dollars.  Don't sell your business to someone without doing a full background and credit check, and making sure that it will be a good fit.

You might even consider your manager.  If they are a great asset, sell the business to them, and have them do it with little to no money down.  They will be more inspired to pay you off than anyone else, and they have already proven their worth.

Rather than selling it in a fire sale, you can always choose to take your time.  If you don't NEED to sell it quickly, you can have your manager run it, and oversee things, while working less and less.  Would 10 hours a week be too much strain for you?

You can even look at support staff of your industry.  We sold our RV park by going to the lobbyists for our industry, and asking them which investors wanted to expand.  They suggested three companies.  We contacted them and got three offers within a two week period, for full price, and on our terms.  

Summary:

If you want to sell your business, prepare yourself to grow it to the point that if you don’t find a buyer, you will still be happy.  No one wants to buy a business that is losing money.  Most business buyers want a passive income investment, they don’t want to buy a job, so getting a good manager is essential.  And, don’t price your business too high, or you might have to take it back.  (If you take it back, you might not be able to grow it again, and you will have lost money on the deal by taking too much.)

Now, go out there and grow!