Selling a Business is Nothing Like Selling a House
Posted by Kipp Krukowski on Mon, Jul 19, 2010 @ 04:50 PM
As a business broker, I am often asked what I do for a living. This is often followed by a discussion about how I help business owners confidentially sell their businesses. Many times, the response is - “Oh, you are real estate brokers.” This is when I have to kindly take the conversation a step further to explain the major differences between selling a business and selling a house.
The first difference is that selling a business requires confidentiality. We sell secrets so that employees, customers, suppliers, and general public don’t know that the business is for sale. We have to be very vague in our marketing and require that a confidentiality agreement is completed before we share details to a buyer prospect. Real estate, on the other hand, is sold with trying to tell as many people as you can and being open about the location and its details.
Another difference is in regards to preparation. Preparing a house for sale may only take a few weeks. Preparing a business for sale may take several years to properly make key changes and to position the business to maximize value for the owner. This may include cross training employees, documenting processes and procedures, controlling expenses, and increasing revenue and profits.
Buyers of businesses for sale are very concerned about the financials of a business. A business broker must be well versed on understanding income statements, balance sheets, and cash flow statements to present opportunities to buyers. Business brokers often need to interact and discuss key points with accountants and attorneys, so they must be educated to tear apart financial statements. Buyers purchase businesses to receive a return on investment. A buyer purchases a business based on its current and future income producing ability. While some commercial real estate has this same quality, businesses in general, often have many additional variables making the transaction much more complex.
A real estate transaction is often very straight forward. Selling a business will require a complex purchase agreement contract often with promissory notes, non-compete agreements, employment agreements, various assignment agreements, and often other documents due to the number of items that get negotiated in a business for sale transaction.
Financing a business is often much different than financing a house. Money for houses is much more available than money for business acquisitions. A house can sit vacant for a period of time before it loses a lot of value in the worse case of a buyer defaulting on a loan. A company, on the other hand, must stay in business to maintain its value. If a business closes its doors, employees and customers go elsewhere and it will be very difficult if not impossible to bring them back. A bank is not in the business of running companies. Because of this, lenders are very risk adverse when it comes to making business acquisition loans. “All the stars need to align” for a bank to finance. This often leads to the business seller becoming the bank.
The business sales cycle is often very long. Houses on average sell in less than 4 months while businesses usually take 6 to 18 months – after the business is put on the market. When you add the preparation time and the post-closing transition time, it is a several year process to sell a business.
After the transaction is complete for real estate, the buyer and seller go their own ways. Very often, the buyer and seller never even meet. In a business for sale transaction, both the buyer and seller must form a relationship and have chemistry for a deal to be a success. Selling a business often requires both parties to spend time together after the sale from weeks to possibly years to transition knowledge and relationships that the business seller accumulated over the years. Since the seller often has to finance a portion of the transaction, they have a vested interest in making sure that the buyer succeeds.
Other than both selling for large amounts of money, there are very few similarities between selling a business and selling a house. A business broker is someone that can help a buyer and seller navigate through the steps to get to a completed transaction.