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Practical articles to help small business owners when selling and buying small businesses.

When the traditional approach to selling won't help you sell your business.

Michael Kerr - Wednesday, January 23, 2019

And why many so small business sales fail.

The retirement plans of many business owners are at risk.

These owners assume they will sell their Small Business for a good price (i.e. sufficient to fund retirement plans) and in a time-frame measured in months (when the reality is years are required). Because most have never sold before it’s easy to understand why. Along with some of their long-standing trusted advisors, owners are basing their hopes for a great outcome on some very out of date assumptions including that;

  • Buyers are plentiful,

  • The valuation process is rational,

  • Banks will readily fund a purchaser,

  • Businesses can be quickly and easily ‘tidied up’ for sale,

  • Advertising will attract buyers,

  • Buyers are rationale and will follow a pretty organised process when evaluating the business.

But topping the list is the assumption that the Traditional Business Broking Model will get the job done:

  1. For any, and all, small businesses, and
  2. Regardless of how the potential sale is triggered.

Listings of food & hospitality, retail, franchise and personal service businesses (collectively ‘main-street businesses’) dominate the major business for sale listing sites. It’s a fluid marketplace and the traditional business broking model works better for owners of these types of businesses.

Of course there are many, many more non main-street businesses
businesses that make up the small business population.

If you own any one of the following non main-street businesses the traditional model probably won’t work;

  • Professional, scientific or technical services

  • Financial or insurance services 

  • New media and creative industries

  • Established tech businesses

  • IT and telco

  • Health care

  • Wholesale trade

  • Arts and recreation services    

  • Education and training    

The prospects of an owner successfully selling one of these non main-street businesses will be significantly improved by understanding these 4 common reasons of failure.

Four Common Reasons Why Small Business Sales Fail When Using The Traditional Business Broking Approach. 

Together with advice on how to get a better outcome.

1. Off-market sales.

Off-market sales include;

  • Sale within an industry e.g. to a competitor, or

  • Between existing business partners, or

  • Between family, or

  • To staff.

More and more off-market business sales are happening.

In many of these cases the buyer, often the ‘natural’ buyer i.e. the owner who can get the most value from the business, will make a direct approach to the owner.

Owner’s need to make the most of these golden opportunities.

But turning them into a traditional business sale process usually ends badly with the ’natural’ buyer moving on. 

What’s required is a much subtle approach that deals with the different dynamics that are central to these types of transactions.

As an example assume a senior management team approaches the owner.

Their considerations and information requirements would be very different to an external buyer, simply because they already know the business inside out.

The challenges for the owner and their advisor are different and can include working out;

  1. How they might partly finance the management team if they are unable to access all the funding they need,

  2. How to keep the management team successfully running the business while also putting an offer to buy together,

  3. How their ongoing relationship with the management team will be impacted if they can’t complete the acquisition.

Owner’s have a fine line to tread.

The management team are probably natural buyers. And while not wanting to be held over a barrel owners also need to be conscious of pushing back ‘too hard’.

Owner’s can’t afford to get a quality management team offside if they genuinely can’t make the acquisition. Either you revert to business as usual, and continue to rely on them to run the business, or they become a major asset when selling to another buyer. 

These types of sales can advance rapidly and often without the owner engaging a suitable advisor. The advice owner’s need to complete the transaction, and how they pay for it, is very different to what you could expect in a traditional business broking engagement.

2. Advertising isn’t reaching the right buyers.

Advertising and waiting for the phone to ring, a core part of the traditional business broking approach, can be a slow death for non main-street businesses. 

Targeted, discrete approaches, based on the owners knowledge or detailed industry research, to likely buyers is a much more effective way.

Owners often know the most likely (natural) buyer(s). Sometimes it takes a little prompting to get it out. Otherwise they can be identified them with some structured reverse engineering and analysis.

Once identified these approaches need to be made professionally and skilfully, to avoid the approach being tarnished as ‘selling because the business is in trouble’ or to overcome the natural tendency for the potential buyer to think they are in the ‘driving seat’ because the owner called them.

But it can be done. It is less ‘public’ and more time effective than advertising where you are hoping on hope that potential buyers see that advertisement!

3. Quality data on small business sales is hard to get and validate.

As a result asking prices are often;

  1. Inflated on the simple understanding that “we can always negotiate down”, or

  2. Set without using any defendable or logical assumptions.

But overpricing simply wastes precious time.

While there are limited opportunities to achieve a price premium by selling to a particular buyer (often the ‘natural’ buyer) it takes more time, upfront preparation and much greater focus on the buyer (to establish how the acquisition helps them) than is covered in the traditional business broking approach

The overall approach to valuing and achieving a premium price needs to change. The approach needs to evolve from ‘set & hope’ to be more dynamic and more buyer specific. This can be done with fuller preparation and use of alternative sale processes e.g. selling by Expressions of Interest where buyers don't get a 'sticker price' and have to submit their offer.

4. Disproportionately high success fees.

Many owners of smaller and micro businesses don’t want or can’t justify paying a success fee that is a disproportionate amount of the sale price.

The traditional business broking model is based on a success fee that is calculated as a percentage of the sale value (say 5% – 10%) with a minimum fee often around $20K or higher.

And from a business brokers perspective it's fair that there be a minimum fee to justify all the effort. I know from personal experience that the effort for a $100K sale is much the same as it is for a $500K or $1M sale.  

But this is a difficult choice for an owner of a saleable but micro or very small business. It’s either sell, and pay a high fee, or put off the sale.

More options for do-it-yourself business sales are emerging. Tailored, pay as you go advice is less well known but available. To access these options and increase the chances of getting their business sold owner’s need to look beyond traditional business broking.

So what’s needed to help more owners sell their small business and get on more quickly with their post business retirement plans?

And what is the root cause of the issues outlined above?

The answer is that both owners and business brokers contribute to the failure in getting a lot of quality, saleable small businesses across the line.

But there is some light at the end of the tunnel for both owners and innovative business brokers.

To get better outcomes owner’s need to educate themselves much more on the practicalities and realities of selling a business, and then take decisive action with the right advice.

For business brokers there is an opportunity to move away from the ‘commission based’ model by repackaging their experience into services and advice that better matches with what owners need.

To better define the potential opportunities I want to use some anecdotal experience to look at the 2 million plus Australian small businesses in another way, rather than just by employee numbers.

When it comes to selling (or not) there are 3 types of business owners.

I think there are 3 distinct types of business owners and their motivations and objectives range from;

  1. Building to sell, to

  2. Building to hold & manage, to 

  3. Being unsure about the plan because they are endlessly busy on a day to day basis.

In terms of a split of the 2 million I'd estimate as follows;

#

Owner type / motivation

% of all owners*

1.

Build to sell

Tiny

2.

Build to hold & manage

Modest

3.

Busy running day to day and unsure about where they are on the spectrum between 1 and 2 

Large (aka the overwhelming majority)

* my rounded estimate :)

Without understanding the owner’s motivations and aspirations, which are often not related to money, the rest of the advice, the ‘technical’ stuff – notwithstanding how good or relevant - will be ignored, overlooked or misunderstood. Nearly all these 2 million small businesses are owner centric or dependent. So for the best advice to resonate it has to address owners personal objectives, as well as business.

The 3rd type – those busy in the day to day hustle - represent the overwhelming majority of what might be considered ‘opportunities’ for business brokers.

The upside for business brokers is that in the first instance many owners would default to them for help or guidance.

From here owners should know that if they limit themselves to a typical business broking engagement, the broker, fundamentally rewarded only on a sale, will give them advice skewed towards getting a sale with the least amount of upfront work, in the quickest time-frame and to the first buyer who makes a ‘half-decent’ offer.

So what does business broking need to do to respond? And what services and advice should owners ask for?

Here are my broad suggestions for both.

OWNERS

ADVISORS (& BROKERS)

Consider paying for expert advice in different ways;

  • By the hour

  • For specific services and expertise

  • Upfront and then rebated

Add ‘fee for service’ and move away from reliance on success fees

Understand no success no fee actually costs time / money and emotional wellbeing

Repackage their experience into new services and offerings

Consider the DIY option and packages and advice that are available

Distinguish and explain exactly what they do in a transaction and how it is different to other advisors close to an owner

Self educate about all aspects of the sale (and acquisition) process

Work more with buyers (rather than exclusively with sellers)

More specifically the key advice (and services) needed by segment would look like this.  

#

Owner type

% of all owners*

Key advice needed

1.

Build to sell

Tiny

  • Business Exit Planning

  • M&A Services (rather than Business Broking Services)

2.

Build to hold & manage

Modest

  • Business Improvement

  • Business Coaching / Mentoring

3.

Busy running day to day and unsure about where they are on the spectrum between 1 and 2 

Large (aka the overwhelming majority)

While they think Broking Services will solve their problems by ‘cashing out’ and handing over the problems & opportunities to a buyer they actually need;


  • Business Exit Planning

  • Business Improvement

  • Business Coaching / Mentoring

* my rounded estimate :)

There are a lot of owners (especially baby boomers) that currently need, and will continue to need, advice and services on transitioning their small businesses.

The traditional business broking model will only work for some owners.

To ensure we get a much higher ‘clearance rate’ of sales of the many viable small businesses we need a combination of greater owner understanding of the diverse ways a sale may happen and innovation in advice and service by experienced, traditional business brokers, many of whom have highly relevant and unique experience.

Until next time, Michael.

DEFINITIONS:

[1] Small Business.

When talking small businesses, the segment associated with traditional business broking, I’m referring to the 2 million or so that are broken up broadly as follows;

Employee numbers

Number of businesses

5 - 19

180 K

1 – 4

560 K

0

1.2 M

TOTAL

2 M

And while counter-intuitive for some there are plenty of potentially saleable ‘businesses’ (with the right advice) in the 1-4 employee sized businesses, and to a much smaller extent, the 0 employee businesses,

Examples of potentially saleable 0 and 1-4 employee businesses range from sole practitioners and para-professionals with a regular client base (think Accountants, Conveyancers) through to ‘businesses’ run by sole traders using contractors and outsourced service providers.

[2] Traditional Business Broking Model.

When talking about traditional business broking I’m referring to the typical approach that works something like this;

  1. The small business owner, driven by the day to day challenges of sustaining the business or an external trigger e.g. a health event decides it’s now time to sell

  2. They approach a business broker with the typical expectations of owners i.e. I’d like to be out in 3-6 months so there is limited time and usually, budget, to properly prepare and package the business for sale

  3. The broker agrees to take the business on a success fee basis i.e. no sale, no commission. Many owners see this is a ‘no brainer’ – why wouldn’t I give this a crack? 

  4. The business ends up being marketed ‘as is’ with the major flaws left in tact and the potential opportunities unexplained

  5. The main promotion strategy is to advertise

  6. The waiting game commences – if you are lucky you get some early interest otherwise it usually peters out 

  7. If you get an interested party the negotiations commence. The direction in price is usually south as there is no competition and limited effort to really understand why the buyer is interested. 

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