Why Selling Your Business is Nothing Like Selling Your House
Sometimes we hear business owners or potential clients compare what we do to real estate brokers. And today, with the advent of selling your own home using technology, some people think you can do the same thing with your business.
There are many reasons why selling your home is very different than selling your business. It is never a good idea to sell your business yourself.
When Selling a Business, Confidentiality is Key
If you are selling your home, you go to great lengths to make sure that many people know this. You put pictures and videos online and you widely advertise the fact that the home is for sale.
When you are selling your business, you cannot advertise that fact to the world because confidentiality is crucial. Confidentiality is crucial because if the world knew your business was for sale, it could be very disruptive to your business and detract from its value. If confidentiality is breached:
* it can be scary for your employees
* it can cause nervousness with your existing customers
* your competitors will use it to sell against you
* it can make your lender nervous
Because you must endeavor to keep the transaction confidential, you have to rely on the network of your investment banker to market the business. He or she will know your industry and can use that knowledge to bring the right buyers to you on a confidential basis.
When Selling a Business, The Group That Buys It Can Drive Additional Value
When selling your house, you generally look to an established set of comparable real estate transactions to set the value. While recent transactions can be of assistance in very large or publicly traded transactions, they generally don’t provide a lot of information for the middle market.
Your investment banker will work very hard to make sure the right buyers see the business you are selling, because the value of the business can vary significantly based on which buyers come to the table. If, for instance, your banker knows that there are several Midwestern-based businesses similar to yours that are looking for capacity, your banker will make sure they know your plant has excess capacity. They will pay more for your business than someone that does not need capacity. Strategic buyers can bring different characteristics to the table that can encourage them to pay more for your business. Financial buyers may want to invest in the business to bring about enhanced growth. This can cause financial buyers to pay more. Whatever the reason, finding the exact right buyer that can pay an outlying value is what your investment banker strives to do during your transaction. Unlike the “science” of selling a house, selling your business is more of an “art.”
There Are No Rules
When selling a house, there are established laws and rules that must be followed. The legal documents needed to sell a house are essentially standard forms. Compare that with selling your business. The documents needed to sell your business are very complicated and have to be created from scratch for every transaction. Unlike the one-day visit from a home inspector, the due diligence process when buying a business is long and oftentimes contentious.
Additionally, real estate professionals go through a tremendous amount of training before they attempt to sell a house. Most real estate agents are intimately familiar with their geography. Compare that with selling a business. Almost no states have regulations on who can sell a business. While it is important to use an investment banker or broker to assist you with the sale, it is equally important to make sure you get a qualified professional with experience in your industry. Get references and match the type of business you have with the experience and skill set of the investment banker you want to use.
Intangibles Can Be a Huge Part of a Business’ Value
Ok, if you happen to own the house where Frank Sinatra once lived, you probably have a house with a large intangible factor, but most houses do not trade based predominately on intangibles. For the most part, house values are determined by very measurable items such as number of bedrooms or acres of land.
Compare that with selling a business, where 100 percent of the value can be related to intangibles. Established brands, for instance, do not need to have any profitability associated with them at all to sell for large values. New or novel technology that addresses a future need can have huge value potential before the company is even fully formed. Making sure that buyers pay for intangible items is something a skilled investment banker will do during the sale process.
Do not get lulled into the idea that because you have successfully sold many homes, you can also sell your business. While your house and your business are similar in that they are probably two of the largest assets in your personal portfolio, you need an expert, specializing in the sale of businesses.
At TKO Miller LLC, we are passionate about educating business owners about the process of selling their company in an open and completely transparent manner. If you are a business owner and you want to learn more about investment banking, transaction timing, selling your business, or other frequently asked questions, please visit our Seller’s Corner www.tkomiller.com/sellers.