Running Your Business – The Value of Representation

One of the comments we hear regularly from our business owner clients is something like this:  “I’ve run this business for so many years, but I’ve never sold a business.”  Businesses with a long legacy are fantastic and generate great interest in the market, particularly if they generate a solid profit.   They are often run by an owner/founder or second or third generation family member who has dedicated the better part of his or her life to the business.  Of course, the owner does not have experience in valuing and positioning a business for sale, and he or she will benefit from experienced counsel.  Properly priced, positioned and marketed, the business will sell more quickly, at a higher price, and with fewer hiccups.  (I say fewer, there are almost always some hiccups.)  When challenges arise during the process, as they inevitably do, an experienced and motivated advisor will take charge of the situation and find a solution.  Finding buyers, identifying financing sources, engaging attorneys and accountants, ensuring steady progress toward closing – these are all key responsibilities of a business intermediary and a significant challenge for the unrepresented business owner.

                  Pricing is a frequent and significant hurdle for most business owners.  By and large, it is generally a seller’s market in the sale and purchase of profitable businesses.  There have always been far more buyers than sellers, although it is often noted that most prospective buyers will not actually ever buy a business.  Nevertheless, the fact is that a properly-priced business should see significant inquiries from interested prospective buyers.  Conversely, an over-priced business – as many businesses advertised for sale are – will see sparse interest from legitimate buyers and usually will not sell.  It is estimated that approximately 80% of business advertised for sale on business listing websites will not sell at all.  As they languish on listing sites, confidentiality is challenging to maintain and the business may deteriorate, losing value.  A professional business intermediary will provide experienced price-to-market recommendations, and will be able to support that pricing in the face of buyer challenges. 

                  Negotiating is another significant challenge facing the unrepresented business owner.  It’s not that business owners in general are poor negotiators – in fact, quite the opposite tends to be true.  Negotiation is a key skill required in many businesses, and many owners have become quite good at negotiating as it relates to their business.  The challenge, however, is negotiating from a position of knowledge and leverage.  Information is critical to negotiating strength, and an experienced intermediary comes armed with extensive knowledge regarding the pricing of businesses, typical deal terms, competition in the market, and other knowledge that can be leveraged through deal negotiations to the benefit of the seller client.  A key responsibility of the intermediary is to find the highest value for the business, and to know when it has been found.  This is difficult to assess when only one potential buyer is at the negotiating table or information about market pricing and terms is lacking. 

A second key to negotiating well is to remain unemotional, searching only for the best results.  The experienced negotiator knows that if both parties to the transaction are not satisfied with the results of the negotiation, the deal will not survive to closing.  This can be a hard balance for the owner to strike, and it is the intermediary’s role to advise the business owner and to advocate for the transaction when he or she believes the highest value has been obtained. 

Homeowners are advised by their realtors to stay out of negotiations for the sale of their homes, due to excessive emotion, offense over offer terms or buyer questions, etc.  To an even greater degree, the business owner who has invested the greater part of his life in building a business will have an ever more difficult time remaining calm under questioning by prospective buyers.  The professional intermediary understands that prospective buyers are not familiar with the business, will have many questions, and are often downright skeptical and averse to risk.  As a result, he or she will be able to answer questions and continue to negotiate without getting emotionally involved. 

From a practical perspective, the buyer will often rely on the selling business owner to assist them with transition of operations after closing, and a good relationship is critical.  If the relationship between seller and buyer deteriorates during negotiations, it will be difficult to keep the transaction together.  The professional intermediary is able to negotiate hard on the seller’s behalf, without sacrificing the relationship between seller and buyer.

                  Finally, and perhaps the most important reason to engage an intermediary, is that the business must continue to operate, and operate well, during the marketing timeframe, which can easily run 6-12 months or longer.  A business can become difficult if not impossible to sell if revenues or profitability are in decline since the most recent financial statements will be used to market the business.  If a buyer or lender sees that things are headed south, they will run.  Accordingly, we always advise business owners that their number one responsibility while the business is marketed is to continue to run the business, increasing sales and profitability if they can.  While short–term positive trends may not significantly affect pricing, those trends will very positively affect negotiating leverage should the buyer attempt to reduce the price, as well as the commitment of both buyer and lender to continue through and close the transaction.  Most business owners are extremely busy already and cannot effectively market their business, address dozens of buyer inquiries, maintain confidentiality, and continue to run the business well.  The latter should take precedence.

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