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[H1587]How To Sell Business

by Dave Kauppi, Dav

Ask any business owner who has sold a business or attempted to sell a business, "What would you do differently?" If he or she attempted to sell it without help, chances are pretty good that the transaction did not succeed. If the transaction were actually completed, chances are that they did not get a good price, but had no idea that this occurred.

We were recently engaged to sell a medical products company. In our process we will identify 50 to 150 companies that would be likely buyers based on similar products, services or markets served. When those targets are approved by our seller client, we get on the phone and contact the buying prospect to see if we can generate some interest and get confidentiality agreements executed.

We were able to identify several interested buyers and were at the stage where they were submitting their qualified Letters of Intent. The LOI basically says that if we complete our due diligence and we find that everything is as you earlier presented it, we will pay you $XXX under these terms and conditions.

We got one offer from a perfect fit buyer and we determined that it was well short of our seller's expectations and well below what our view of the price for similar companies in this market niche. We called this buyer to discuss his offer.

When we told him our client's range of expectations, he said that it was way too expensive. We asked him what basis he had for that conclusion, he replied that he was looking to pay 5 X Cash Flow for a business. We told him that recent transactions indicated that similar companies were selling for 2.5 times revenues and not a price based on a cash flow model.

Let's take this a little further with some ball park calculations based on our transaction. For example, if our client had $5 million in revenue and a 20% cash flow margin, his cash flow is $1 million and according to this buyer, his company should sell for 5 X $1 million or $5 million. The market view, however, is that this company is worth $5 million X 2.5 or $12.5 million. When we dug a little deeper into our buyer's offer we found out that he currently was in the process of buying another similar company.

When we inquired for more detail we found that this other company was a long time competitor, the owner was getting ready to retire and approached this buyer to see if he would be interested in acquiring them. We asked the buyer if the seller was represented by an investment banker, business broker or merger and acquisition advisor. He said that the seller was not. I asked him if there were any other buyers involved in the process. He said that as far as he knew, he was the only buyer. I asked him how the selling price was determined. The buyer said that he set the price based on, you guessed it, 5 X cash flow.

Let's see what this seller's approach is going to cost him. If we assume that he was very similar in size and cash flow to our client. A competitive market price in a formal merger and acquisition process would be $12.5 million. Our buyer will pay him only $5 million and the seller will close thinking he got a fair deal without any market validation. This is a $7.5 million mistake that could have very easily been avoided by hiring a business sales professional that would have invited in multiple buyers and multiple competitive bids.

Well, at least the seller avoided all investment banker fees. This is a sad end to a 25 year history of business excellence. Unfortunately it happens all the time.

To many entrepreneurs, selling your business is like selling your kid.

Now someone else has come along and they want to take that little baby from you, and not give it back.

No one said selling your business to another would be easy. It can entail your hardest move. But, it can also be your best move. Here's why…

Why You Should Sit Back, Sell Your Business and Let it Go Now<

1. More Financial Independence-- As entrepreneurs, many of us dream of one day trading all of our hard work for a big fat paycheck from an acquiring company so you and your family can be secure for life. It's the stuff headlines are made of or the cover of a magazine showcasing me as a newly minted millionaire beaming with delight at my newfound wealth when I sold my assisted living center for an excess of thirty-five million dollars. Once you sell your business for maximum profit, the money is in the bank. Now, it can be invested wisely whether it's in stock market shares or just safe and secure in the bank earning 5%.

2. More Fun- Most people want to retire or at least semi-retire. They want to move on and fulfill their lives in other ways. And they want to travel and see the world. As business owners who spend most of their time and energy on developing and building their business, it's not very often where you'll be in a position where you can travel abroad for 6 months. Or, go abroad for a year. Or, go travel around the world. When you sell your business for maximum profit, you gain time, independence and freedom. These are critical words to go and enjoy the fruits of your hard earned labor.

3. More Emotional Freedom - As a business owner you will face disappointments in business. There are setbacks. Despite careful planning, things don't always happen when and how you want them to. You will suffer from feelings of frustration, fear and anxiety. I even know of business owners who have to drink Pepto Bismo, Mylanta or Maalox every morning and night to get rid of their nervous cramps and feeling of nausea. They live in constant terror of an uncertain future. They keep thinking although they've made great money in the last year, 3 years, 5 years or even 10 years but there is no guarantee about next month and upcoming years. Selling your business for maximum profit I one of the easiest ways to get rid off fears and anxieties brought on by the onset of owning your own business.

Now, the question is do you want to gain more financial independence, emotional freedom and have more fun?

If your answer is yes, then the time to start thinking about selling your business is NOW! You should not wait until you hit the magic age of 55, 60 or 65. The process starts way, way, way, way, way, way, way, way earlier than that. If you start early, you can get prepared. If your organized, selling your business can be a smooth transition.

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Both Dave Kauppi & Harvey Zemmel are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Dave Kauppi has sinced written about articles on various topics from Business Loans, Mergers and Tax. is the editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and President of. Dave Kauppi's top article generates over 18100 views. to your Favourites.

Harvey Zemmel has sinced written about articles on various topics from . . Harvey Zemmel's top article generates over 14800 views. to your Favourites.