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Value Creation Blog

Why Selling Your Small Business Is A Risky Affair

Posted by Josh Patrick

sellingbusiness resized 600Rob Slee from the Midas Institute writes a lot about different values a private business lives in at one time.  These various values all depend on how the buyer looks at your business.  Besides the formal value worlds that Rob talks about is the size of your business.  When you sell a business the smaller your business, the riskier the sale will become.  Buyers of small businesses have different resources available than buyers of larger privately held businesses.

Two smart things I did when I sold my vending business were I built it to a size where buyers with significant assets were interested in the business and I managed to get the interest of more than one buyer.  Both of these activities helped me get a better deal than many smaller companies could get.

The smaller your business, the higher risk you’ll likely take when you sell your business.  You need to know how your business size fits into the world of business transfers.  If your business does less than five million dollars buyers are likely to want you to hold paper either through a buyers note or an earn out.  The more volume your business does the less buyers insist on you taking all of the risk while they buy your business.  The risk being you’re going to sell your business not get all of your money and hope the buyer runs your business well.

Buyers of smaller businesses tend to be people without significant assets.  Larger businesses are able to attract buyers that can afford to pay cash for their business.  These buyers want to pay cash so the seller is out of their hair.  Smaller businesses don’t provide enough sales or cash flow for big businesses to pay attention.  That means the buyer pool comes from smaller businesses or individuals.  Both of these groups are often short on money.  When people like this buy your business they’ll require that you’ll take a significant part of your sales as a sellers note of some sort or other.

When you sell your business and your buyer has few assets you’ll become their bank.  A successful sale of this sort depends on how well your buyer runs your business.  The better the business is run the higher the probability you’ll get all of the money that is owed you.  If your buyer doesn’t do so well and makes some large mistakes you’re likely to pay the price.  They can end up blaming you for their problems and just stop paying you your deferred payments.  Now you’re stuck with deciding whether you’ll take a haircut or sue them for what you believe you’re owed.

If you’re going to provide owner financing, act like a bank.  This should be an obvious position to take.  It’s also one that I rarely see done well.  When you act like a bank you need to make sure you get adequate security from your buyer.  Adequate security means your buyer actually has real collateral that can be turned into cash if they decide to stop paying you.  This will be a tough part of the negotiations.  If you don’t take a hard stand you could end up holding the bag for a large portion of your sale with no way to collect money that is owed you.

There are lots of reasons to sell your business.  The last thing you want to have happen is for you to have to take over your business after it has been badly damaged.  I know that when I sold my business I made sure I got paid in cash.  That was because I knew about the horror stories.  I was clear that the deal was cash.  I was also lucky my buyers could afford to pay me in cash and felt it was in their best interest to do so. 

You might not be so lucky.  If that’s true make sure you paper your deal properly.  You’ll thank me if you do.

We’ve put together a special report called the 7 Steps of Leaving Your Business in Style.  This report talks about steps you’ll need to take to successfully transfer your business to the next generation of owners.  To get your copy of this report, click on the button below.


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Topics: for business owners, exit planning, finances