Some business owners tell me, “I don’t want to put in much effort into the business sale process initially. I’ll provide my tax returns and current financials. You can then estimate value, put together a brief information package, and then if there's an interested buyer we can provide them with more information later.” This is a short-sighted way of marketing a business that will significantly decrease the probability of a successful sale, and is not in the best interest of either the business owner or the business broker (for this reason, Codiligent won't provide this type of representation).
Here are a few of the reasons why this is a bad practice:
To successfully sell your business, the business broker or investment banker must become deeply familiar with it. If a business broker has only partial information, they can't do a comprehensive review of the business. Without developing a far deeper understanding of the business, the broker won't be able to effectively promote the business, confidently answer buyer questions, or accurately respond to objections.
Understanding business value requires more than a quick review of financials. Without developing a complete understanding of the business a business broker will not be able to arrive at a well-considered estimate of value. There are a variety of issues that could impact value and marketability that aren't discernible by reviewing the past two years' tax returns. For example: Are there proprietary systems or other types of intellectual property that give the business a significant competitive advantage? Is there a high concentration of revenue from a few key clients where if one were lost it would have a disproportionate impact on the business? Are there expiring key contracts?
The business broker needs to be able to defend the value to sophisticated buyers. A simplistic multiplier approach or rule-of-thumb for valuation based on limited information may significantly under-value or over-value a business. A business broker who hasn't developed a deep understanding of the business and its value will be eaten for lunch by a buyer's sophisticated advisors.
A serious buyer will insist on more information prior to submitting a Letter of Intent (LOI). Nearly all serious buyers will insist on reviewing more information before becoming comfortable submitting a LOI. Consequently, a business seller will have to provide the information eventually, anyway, so why not take the time to do it right by providing complete information up front?
Business sale success is dependent on establishing the buyer’s confidence in the business and reducing uncertainty. If a buyer asks the business broker a question (particularly if it seems like an easy one), and the broker can't answer it without a delay caused by seeking information from the seller, a buyer will often become less confident and less certain about the business. The delay may cause the business buyer to think, ”I thought I asked a pretty simple question. Why is it taking so long to get an answer? Are they serious about selling? Are they disorganized? Is there a problem which is causing them not to want to answer the question? Maybe I should devote more attention to another business I was considering.” Contrast this with the confidence a buyer would have if they are provided with solid, accurate, and complete information in a confidential comprehensive information package.
There's a greater risk that the price and terms will be re-negotiated as a result of due diligence, or worse – that the deal will die. If, despite having incomplete information, a buyer makes an offer and then during due diligence discovers new information, there’s a good chance that the buyer will use it to negotiate a lower price, or, if the newly discovered information is material, they may back out of the deal. This is problematic for another reason: most Letters of Intent call for an exclusivity period for the buyer from the time the Letter of Intent is signed until they complete due diligence (often a 3-6 week period). This means that active marketing and communication with other buyers must cease during this time frame, so in essence the business is off the market for 3-6 weeks.
Codiligent business brokers strives to do everything it can to increase the probability of attracting the right buyers, getting the buyer to complete a transaction, and pay the best possible price and terms. This necessitates the business sale process being front-loaded with information requests, analysis, packaging of the business, and researching buyers.
A business sale is usually one of the most important transactions of a business owner’s life, and it deserves to be handled as such. However, just because the process is comprehensive doesn’t mean it will take more time than if handled by a broker who fails to do a similar up-front process. Codiligent strives to make its proprietary process and methodology for the collection, analysis, and packaging of the business as efficient as possible. Might it take more initial work than a broker who rushes the business to market? Perhaps - but through greater efficiency and effectiveness the overall time commitment for the entire process is generally much lower: there will be a greater likelihood of attracting quality buyers, fewer unproductive meetings with buyers, less time answering buyer questions, easier negotiations because of reduced uncertainty, and far greater organization and efficiency during due diligence.
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