Photo (CC) Diana Parkhouse, on Flickr
If you have ever sold a home, you can sell your business in a small town
A guest article by John Warrillow, author of Built To Sell
Owning a business in a small town has many benefits, but one of the drawbacks is the difficulty of finding a buyer for your business when you decide it is time to move on. The pool of potential acquirers is smaller and capital for buyers is harder to find. But if you understand the process of selling a business, then you can take steps to minimize the barriers to selling your company.
Selling a home and selling a business are remarkably similar tasks. If you’ve ever felt intimidated or confused about the process of selling your company, just think of the transaction in the same way you would if you were selling your home.
Step 1: Staging
When you decide to sell a home, the first thing you do is make sure it shows well. You de-clutter cupboards, replace light bulbs, paint and perhaps rearrange some furniture to project the look or feel you think buyers want.
Staging your business is much the same:
Organize: Arrange your customer records so a prospective buyer has a sense of who your customers are, how often they buy and how much they like what you sell. If you have contracts, standardize and organize them into a neat binder or easy-to-search electronic file.
Fix what’s broken: Take an “outside in” look at your business and fix whatever is obviously broken. If your receptionist uses a phone with duct tape holding the cord into the receiver, buy a new phone. If a key piece of machinery needs maintenance, have it refurbished.
De-clutter: If you rarely offer certain products or services, get them out of sight. Remove them from customer-facing communications and eliminate any signs of stuff you no longer sell. The extra clutter will dilute buyers’ attention and distract them from the core of what makes you successful.
Put on a fresh coat of paint: Take a look at your external communications—your signage, website, logo and brochure—and make sure it is all consistently branded. A buyer will likely want to tour your office/shop/plant, so make sure your physical location is smart and tidy. Give employees a half-day away from their regular tasks to de-clutter their work area.
As you’re “staging” your business, remember the old saying: people buy with emotion and justify with logic. Staging your business is about seducing as many prospective buyers as possible to fall enough in love with your business to engage in a negotiation.
Step 2: Find an agent
Once you have readied your house for sale, the next step is to find an agent to sell it. Sure, you could sell it yourself, but selling a home is a big financial transaction, and typically an agent earns his or her commission by working to market and sell your home to a broad range of potential buyers.
Selling your business can be an even larger transaction so having a broker represent you professionally is important. A brokers job is to run the selling process so you can keep focused on your business.
So how do you find a broker if your business is in a small town?
Most business brokers work from cities with a population of at least 100,000 so you will need to target your search to the closest city. Brokers work on a commission so before they will be willing to drive to your town to meet with you, they will need to know your business is large enough (and therefore their potential commission big enough) to warrant driving out to you.
What’s big enough? I spoke to Brad Bottoset the owner of Reno-based business brokerage The Liberty Group of Nevada. Brad’s firm often represents sellers from small towns and one of his latest listing is in Fallon Nevada (population: 7536).
“If you have a business with at least $50,000 in profit (after you have pulled out a fair market salary and benefits), it will be worth it for a broker to drive to your town.”
Step 3: Create the marketing material
Once you have selected a real estate agent to represent you in the sale of your home, the next step is to create the marketing materials he or she will use to promote your property.
The offer sheet typically includes a picture(s) of your home along with key statistics like the number of bedrooms, lot size, and so on. Your agent may also take an ad out in the local paper. These materials are designed to persuade consumers to invest more time in your house by booking a showing or attending an open house.
When selling your business, your representative will create a “teaser” document designed to entice prospective buyers to invest some time to get to know your business. The teaser is usually a one- or two-page document that includes a few key stats on your company, such as your current revenue and profit and your projections for the future. Your company name is usually disguised to minimize the chances of key customers and employees hearing about it being on the market.
The importance of disguising the teaser is paramount when it comes to selling a business in a small town.
“In a small town, there is often only one or two businesses in a certain industry,” Bottoset said. “If I was representing a Ford dealership in Los Angeles, I’d describe it as a car dealership in the teaser. If I was selling a Ford dealership in a small town, I’d describe it as ‘a retailer.’ You need to be vague in a describing a small town business in a teaser to avoid the entire town finding out a business is for sale.”
Just as a real estate agent would, your broker will then work his or her Rolodex and send this teaser to a list of people who might buy your business. Some brokers may list your business on one of the Multiple Listing Service (MLS)-like listing services for businesses (e.g., www.bizbuysell.com) to draw interest from outside of your area
Make sure your broker includes some of the benefits of living in your town in the teaser. There are a lot of people who work in corporate jobs in the city that dream about buying a small business in a small town and enjoying life at a slower pace. Paint a picture of the lifestyle benefits of living in your area.
If a potential buyer wants to know more about your business, then your representative will ask that person to sign a nondisclosure agreement (NDA), after which he or she will get a comprehensive summary of your business performance and your business plan.
You want to ensure your teaser has just enough information to lure a buyer to get as far as signing an NDA.
Step 4: The showing
Once your agent puts the sign on the lawn, he or she starts scheduling showings. Potential buyers and their agents walk through your home and have a chance to see first-hand what you’re selling.
When selling your business, potential acquirers will want to schedule a showing—called a “management presentation” in Mergers & Acquisitions (M&A) parlance. The management presentation is your chance to paint a picture of what you have built and the future you see for your business and industry. It’s also a chance for the potential buyer to meet you.
Just as a stranger walking through your home will generally be gracious and avoid making negative comments about your choice of decor, the potential buyer of your business typically asks only polite questions at the management presentation, steering clear of saying anything you might take personal offense to (those comments and questions are usually saved for due diligence).
You’ll get one trick question during the management presentations:
“Why do you want to sell your business?”
It may be tempting to explain how tired you are and how much you need a vacation, but don’t. The prospective buyer wants to know you plan to stay on for a while to help them run your business. Stick with an answer like “I’m at a stage of my life where I’d like to create some liquidity for the value I’ve created so far and find a way to participate in our next stage of growth.”
Step 5: The offer
Once your real estate agent has shown your home to a number of potential buyers, you start entertaining offers. Your agent does what he or she can to drum up more than one offer to create some competitive tension in your deal and, possibly, a bidding war. You review each offer and negotiate the finer points.
When selling your business, your management presentations will (you hope) be followed by an offer(s) in the form of a non-binding letter of intent (LOI). The LOI will include the price the buyer is willing to pay for your business (both the cash portion and any earn-out calculation) along with a request for a period of exclusivity to perform “due diligence” so the buyer’s team of professionals can verify the various claims you made in the management presentations and in your marketing materials.
Due diligence is the equivalent of a home inspection in a real estate transaction. Most offers to buy a home or business have conditions, and when you accept the offer with conditions, you’re essentially taking your house off the market while the buyer inspects your claims. Just like when selling a house, you have to take a calculated gamble that the offer was made in good faith and that the buyer will follow through on his or her stated intention to buy. However, taking your property off the market is a risk, and if upon closer inspection, the buyer sees something of concern, then you might find the offered price reduced (very common) or the buyer walking away entirely.
Due diligence is a two-way street. Bottoset said, “as a seller, make sure the offer gives you an opportunity to complete some due diligence on the buyer. You’ll want to thoroughly review the buyer’s credit history, their personal financial situation, and their business experience to make sure you’re comfortable selling them your business.”
Step 6: The inspection
When you agree to an offer to buy your home, it is often contingent on a home inspection. A home inspector will come to your home and examine every inch of it—the shingles on your roof, the wiring in your electrical panel, your furnace, your plumbing…. You can expect that a home inspector will find that mold you tried to hide behind a shelving unit in the basement and the leak in the skylight on the third floor. His or her job is to find any and all of the problems in your house so that the buyers can either be assured that they are not purchasing a lemon of a house or at least have fair warning about issues that may arise.
When you agree to an offer to buy your business, the buyer will need to complete his or her due diligence before the offer is finalized. The buyer will send in a team of people whose job it is to validate the claims you made in the management presentations and your marketing materials and to uncover any inconsistencies between them and reality.
Home inspectors are usually engineers. Due diligence folks are MBA-types who have a passion for detail and an insatiable appetite for data. You probably won’t like them—after all, their job is to expose your business and its faults. They will ask for all of your customer records and history, your financials, your budgets and business plan. They’ll want to pore over your employee records and review your marketing collateral. Every nook of your business will be dusted and inspected for cracks while the MBAs look for details that don’t add up.
Just like a home inspector will find things, the MBAs will discover information or facts that may not show your business in the best light. Relax. Every business has warts, and assuming you did not lie in any of your offer materials or presentations, it’s natural for the buyer’s diligence team to find them.
The buyer may ask for a discount based on what the MBAs discover during due diligence—just like the home buyer asks you to fix a leaky roof or pay for it to be fixed if the home inspector finds one. It will be up to you either to accept the discounted price or to start the process over again.
Bottoset agreed on the importance of being honest during the diligence process. “If something has been misrepresented by the seller, even if the error is not intentional, it can kill the deal,” he said.
If you get through diligence without incident, the buyer will schedule a closing meeting at which you will need to sign a number of documents (typically at the buyer’s lawyer’s office). Once all the documents are signed, the deal is done!
If selling your business seems daunting, don’t be intimidated. The process is very similar to selling a house and can be much more rewarding.
John Warrillow is the author of Built To Sell: Turn Your Business Into One You Can Sell. Find out if you have a sellable business – and what you could get for it – by taking the 10 question Sellability Index Quiz at www.BuiltToSell.com.
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