Choosing a Buyer for your Business
Selling a small business can be an exciting and emotional roller coaster. While there are many important decisions to make, deciding on the new buyer of your business is key. Finding the right buyer is vital to a smooth and successful transaction. It is tempting to take the first offer or the highest offer. However, it may not always be the best one, so do not be blinded by the dollar signs.
As the seller of a small business, you will want to have a level of comfort with the new buyer. This is true, especially during the transition period and post-transaction closing. In many cases, the seller continues to live in the community where the business resides. As such, you may hear both the positive and negative about the new ownership and change in service.
Working with a Business Broker
As the seller, most often you can choose who buys your business, but many do not. Like selling a house, a business receives offers the seller can review and select from. Using a business broker can help you navigate many of the complexities of selling a business. As part of the process, the broker will create a marketing campaign and actively work with their network to generate interest in your business. If successful, the broker will help locate potential buyers.
Often the broker acts as a moderator between the seller and buyer. In some cases, the broker will select a qualified buyer and proceed with the sale as per the listing agreement without considering whether they are a good fit for the seller and the Company. As the seller of a small business, being part of the selection process can help the transaction go smoother and be successful. Selecting the right buyer can be helpful in several ways. Here are a few aspects to consider when choosing a buyer for your company.
1. Determine Your Goals
Determine what is most important to you in the sale of your company and what your goals are. Price, terms of the deal, and timeframe are just a few to start with.
2. Select the Type of Buyer
The next important decision to make is determining who might buy your business. You have more options than you think. Anyone can be a potential buyer. This can include employees, customers, suppliers, or competitors. A good question to ask is who you would not consider selling your business to. Once you understand this, you can plan to target those you would sell your business to. There are several types of buyers and each has different motivations.
- Individual Buyers: employees or family members
- Strategic Buyer: customers, suppliers, or competitors
- Financial Buyer: companies or individuals with money to invest
To learn more about each buyer, their goals, and motivation, see Selling to a Financial vs Strategic Buyer.
3. Qualify the Buyer
After your business goes on the market, it can take some time for potential buyers to make an offer. The entire process of selling your business usually takes between 6-10 months. While you may receive multiple offers for your business, some buyers are more qualified than others. Not only do you want someone who can pay you, but who can also successfully run the business.
Many documents can be required to screen potential buyers. Documents such as confidentiality agreements and financial background information are standard. A broker can help you review these documents to make sure the potential buyer is financially qualified to purchase the business. This can include reviewing available funds, sources of financing, credit background, and ownership. You will also want someone who has the business knowledge, management experience, and skills to run the company.
4. Understand the Value of your Company
For both buyer and seller, the bottom line comes down to what the business is worth. A business valuation can help a business owner understand what the value of the business is and help in determining a listing price. It can also help you defend and support the price you agree to with the purchaser. For a buyer, a business valuation can help them feel confident they are buying a business at the right price. In both cases, a business valuation can help in the negotiation process. Peak Business Valuation is happy to provide a business valuation. Schedule a free consultation to get started.
5. Work with the Buyer during the Due Diligence Process
Once the seller accepts an offer, the buyer will perform a level of due diligence. The due diligence process helps confirm the information the seller provided. The buyer will also identify concerns and risks about your company that can warrant a reduction in the purchase price. It is important to make sure the purchase price accurately reflects the value of your company and meets your exit goals. During the due diligence process keep communication open and positive. You want to make sure both the buyer and their accountant are on the same page as you and your advisors.
6. Consider Your Readiness
One of the last aspects is to consider if you are personally ready for the transition. Are you emotionally prepared to hand off your business? Do you have a vision and plan for what you will do next? Considering this can help smooth the transition of your business and ensure a successful sale.
7. Build a Relationship with the Buyer
Transferring the business and key relationships to the new owner can be much easier if you have built a level of trust. Relationships can take years to build and throwing them to someone new without proper communication can leave the relationship bridge broken. The most successful businesses post-transaction are the ones that have a strong relationship between the buyer and the previous owner. Building this relationship can help transfer relationships and overcome challenges that come up.
8. Plan for the Transition Period
Keep in mind that during post-transaction, the seller usually remains with the business for at least two weeks or longer to ensure a successful transition. In some cases, the purchase agreement includes ongoing consulting. Even if something formal is not agreed upon, having a seller who is willing to answer questions is immensely helpful to a buyer. If you plan on selling to a key employee or family member, create a succession training plan to educate the new owner before handing over the reins.
Summary
Many sellers jump at the highest offer or to later regret their decision. Be sure to consider all aspects of an offer before selecting a buyer. Know your personal goals and be patient when selecting a buyer. Peak Business Valuation is a leading business appraiser in Utah. We help small business owners across the country understand the value of their business. Questions are always welcome! Please reach out by scheduling your free consultation below.
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