It probably goes without saying that selling a business is no easy feat. One of the biggest factors in determining the risk level to a potential buyer will be your company’s sales volume, which directly translates into how buyers will see its value.
In fact, selling a small business is typically far more difficult than selling a large one. Why? Because the smaller the business, the harder it is to find a buyer who will be willing to risk a smaller payoff. So, the smaller the revenue, the more likely it will be to attract mostly individual buyers or owners with other small businesses.
So, what’s the problem? To put it simply, individual buyers don’t characteristically have enough excess capital to buy your business outright. This means you might end up with a seller’s note or an earn out, which translates into you getting less cash up front and assuming more risk.
That risk is the possibility you’ll never get paid the full amount for your business. Specifically, the buyer struggles to run the business properly losing cash flow, and blames the issues on you then slows or even stops payments.
To prepare your company for sale and avoid these pitfalls, it’s important to consider two potential paths:
The first path involves getting adequate security from the buyer. This means your buyer must provide collateral which can be turned over for cash, in the event they can’t or won’t make their payments. This path will require some tough negotiating skills and a hard-nosed approach on your part.
If you go down this patch, never take someone’s word or believe what they say in good faith, even if you know them personally. Always get security agreements in writing – preferably in the form of a legally binding document.
The second path involves growing your business to attract buyers with significant assets. Typically allowing you to avoid a seller’s note collection problem. That likely will require an average of at least two million in annual revenues with a strong, steady cash flow.
If you think you can hold out on the sale to accomplish this, it will reduce your risk during the transition and, once you get to this level, it’ll be easier to attract higher quality buyers and hopefully more than one. With numerous bids, you’ll walk out with the best deal possible.
Regardless of your reason for selling, when you’re ready to do so, don’t be laissez faire about the risk – especially if your business is small. And never agree to sell unless you’ve set up a sure-fire way to get paid, even if the buyer tries to back out.