What Factors Matter In The Sale?
Selling a business is complicated. It would be impossible to enumerate all of the factors that matter in a sale - that’s because no two sales are exactly alike. The seller/buyer relationship matters. Business growth over time matters. Non-disclosure agreements matter.
You get the idea.
What we’re going to look at today are the five things we’ve found that are most important to the seller in a business sale. These five factors are:
How long it will take to sell the business
How much the business will sell for
How long the business owner is expected to stay involved after the sale
The non-compete terms in the deal
The due diligence required to complete the sale
Of these factors, the first two are, by far and away, the most important to most sellers. With that in mind, let’s take a closer look at all five of these factors, each of which are crucial to how happy the seller will be with the sale:
How long it will take to sell the business?
The time it takes to sell a business will vary considerably from business to business. Jason Brice can usually sell a business within about 6-9 months, with some businesses taking 3 or fewer months to sell, and others taking 12 or more. The number one lever however, is going to be the price. Often Jason will say that a business is worth $100 and the seller will want to take a period of time to sell it for $130. After spending six months unsuccessfully getting any offers, the asking price gets lowered and it sells quickly for the $100 that Jason said the business was worth. In that scenario, it may have only taken 30 days to get the business under signed offer, once priced correctly. The single biggest factor that will delay a quick sale is listing the business for sale at above the fair market value.
There are also things that business owners can do to expedite the process, from having all of their financial documents in order to making themselves available for meetings with their business broker and potential buyers.
When you consult with your business broker, they should be able to give you a better estimate of how long it will take to sell your business in your given market.
How much the business will sell for?
To help you better understand the value of a business, we’ve created an entire post on the subject of what a business is worth.
There are really three factors that the seller cares about: the price, the payment terms, and the financing that the buyer can secure.
It’s important to note that the buyer can negotiate on price in a variety of different ways - some of the methods of financing the deal include earn-outs which enable the seller to be paid if certain financial thresholds are met. This can help a buyer who is uncertain about future business performance and a seller who believes the business is worth more than a buyer is willing to offer upfront to come to a deal.
The other three major factors business sellers care about
How long the business owner is expected to stay involved in the business after the sale?
In the vast majority of cases, a business owner will need to continue to work at their business (training the new owner) after it has sold for a short period. In many cases, they’ll be expected to work at the business full time for approximately two months, and be available for periodic consultancy for a few months afterwards. Their pay for this work will be included in the sale price of the business.
For some business owners who want to retire quickly, it might be tempting to accept a lower offer in exchange for an earlier retirement. That’s one of the reasons it’s always a good idea to start thinking about your retirement plan and the sale of your business well in advance of the actual date you want to retire.
The non-compete terms in the deal?
Some business owners want to sell their business because an exciting new opportunity is on the horizon, and they want to seize it as soon as possible. If that new line of business is similar to their old business, they may find that non-compete terms will restrict their ability to pursue the new opportunity. Nobody wants to buy your business if you are going to compete with them in the same field.
For this reason, different non-compete clauses can have a substantial impact on a seller’s willingness to take a deal. Non-compete clauses in Canada are enforced by a complex body of law - it’s important to have your business broker and lawyer review any non-competes before you sign off on the deal.
The due diligence required for the deal?
There’s a lot of due diligence to be done when selling a business, and some sales will require a lot more effort than others. If you’re looking for a 100% share purchase agreement, expect to have to provide a lot of paperwork - and hire experts to help accordingly.
It’s important for sellers to do their due diligence, too, ensuring that the buyer has the appropriate financing to buy the business, and the skills to run the business in a way that will maintain the seller’s reputation. A qualified business broker can help with all of this.
These are the five factors we’ve found that most influence a seller’s satisfaction with a given deal. As we stated above, there are a whole confluence of factors that can affect a deal - keep reading our blog to learn more. And if you’re looking for a business broker in Vancouver, give Jason a call.