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When is it Too Late to Sell your Business?

When is it too late to sell your business?

On average, over half of the business owners that contact brokers have distressed or declining businesses.  These businesses may be suffering from owner inattention, lack of innovation, cash flow problems, or even heading to an imminent bankruptcy.  Many, on the advice of advisors, contact a broker hoping a sale will solve their problems.  These businesses are often called distressed, turn-around or pre-liquidation opportunities.

Sellers should not expect to receive a premium on a distressed business, and rarely will a buyer pay for goodwill.   While a broker may be able to find a buyer willing to pay higher than liquidation value, it can be difficult to close a deal: time is critical and the seller is negotiating from a weak position.

It is a very rare buyer that has the confidence, vision and capital to take on a distressed business.  It’s already hard to find the right buyer for a profitable business; bad “facts” narrow the pool of possible buyers much further.  Once a shrewd buyer realizes that the business is distressed he can either make a low-ball offer or wait out the failure and try to buy the assets through the bankruptcy proceedings

Why do many sellers wait to long?

1. Many buyers feel that selling is “giving up” on their business.  They believe they just need to refocus to fix the business but many are too burnt out or stressed to effectively do that.  Once they realize it they may have wasted even more months or even years!
2. They miss time the market.  Hindsight is 20/20 and few owners want to sell when their business is flying high, but that is the best time to sell and receive the maximum value of the business.
3. They don’t think about an exit strategy.  Acknowledging an exit strategy, retirement or a life change can be difficult.  Many business owners put off planning about their eventual transition until the business is underperforming or failing.
4. Business valuation.  Many owners are surprised when they have their businesses valued or appraised.  It’s not uncommon for an owner to internally overvalue their business, often driven by the emotional value it represents and the years of hard work they invested.  A realistic market appraisal combined with the tax implications can be a sobering reality!

It may be helpful to identify what “stage” your business is in.  Below is a chart for the common business lifecycle; this simple graph is representative of many business models. Generally a business grows, matures and then begins a slow decline which would require reinvention, capital improvements or new operational efficiencies.

Many sellers wait until the 4th stage before considering selling.  Unfortunately, this is the stage when it’s both difficult to sell and the business will be valued at a considerable discount.  At the least, business owners should be aware of the factors that drive the value of their business.  Not only will this help them maximize the price of the business, but gives an owner the data needed to make a decision about selling.

When is too late? If you have only weeks or months left before you are forced into bankruptcy there may be little a broker can do. A quick closing can still take many months between due diligence, financing and drafting sales agreements.  Generally selling a business can take one to two years–especially if the business needs to be prepped.  All things being equal, you will be better off selling your business before it peaks, rather than after.

Planning your exit strategy should begin early: talk to your lawyer, accountant and a broker to determine the value of your business and the tax implications of the sale.

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