Business Sales Average Six to Twelve Months
Business owners should generally give themselves six to twelve months to sell their business. This time frame begins when a business is listed for sale and ends when the business is actually sold. Most professional business brokers require twelve month listing agreements in order to allow a sufficient time for a business to sell. Businesses will sell more quickly when its financials are straight forward and transparent, when there is a seamless transition plan in place for the buyer, and when the business is priced appropriately. Once listed for sale, the best way to effectuate a quicker sales process is by reducing the asking price. Key factors influencing the timeline of a business sale include the amount of preparation spent organizing financial and obtaining requested due diligence materials, the complexity of the business or industry, the length of formal due diligence, and appropriately pricing the business at the initial listing stage.
Formal Due Diligence Part of Selling Process
During the listing process, if a buyer makes an offer (with a refundable deposit) that is accepted by a seller, the deal then goes through the formal due diligence process. This process is usually 30-60 days and involves a comprehensive review of the available financials and company records of the business to make certain the business is performing as advertised. For larger business sales, many buyers often use accountants and attorneys to assist them with reviewing and analyzing the due diligence material. This frequently leads to the due diligence process taking more than sixty days. A lengthy formal due diligence process adds time and uncertainty to closing the deal, so having organized and transparent financials during this process is of paramount importance.
Transparent Financials Help Businesses Sell Quickly
- Most buyers of businesses will want to see a clear and coherent set of financials prior to making an offer on a business.
- A transparent set of financials contain the last three years of a company’s tax returns (and/or profit and loss reports) showing all the company’s revenue and verifiable adjusted profits.
- If there are personal expenses of the owner that flow through the business, they should be clearly itemized and ready for verification.
- It is customary to give a qualified buyer the set of financials of a business during the preliminary due diligence phase.
- Transparent financials enable buyers to act more quickly both before and during formal due diligence because they will be able to accurately determine the adjusted owner benefit (or true economic profits derived by a working owner) of the business.
- During formal due diligence, buyers often verify the financials from examining bank statements, payroll records, or point of sale reports.
- Accurate and reliable record keeping will speed up the formal due diligence process, along with making it far more likely the business deal will proceed to closing.
- Further, transparent, reliable, and accurate financial records is a must for businesses to qualify for lending backed by the Small Business Administration (SBA).
- Since many buyers use SBA-backed deals to purchase businesses, reaching these buyers allow for businesses to sell more quickly.
Transition Plan After Closing
The more active role of a business owner in the day to day operational activities, then the harder and longer it takes to sell a business. This is because many buyers will fear that without the owner’s personal involvement in the business, key employees or customers may no longer remain after the sale. For such businesses, it is crucial for the seller (with the business broker’s assistance) to develop a post-closing plan to facilitate a seamless transition. Examples of such plans include the seller agreeing to stay after the sale on a long-term basis, a comprehensive plan to assist and train the buyer after the sale, identifying staff members who may replace part of the owner’s operational role, and alerting customers of the transition in a way that decreases their anxiety.
Price Business Appropriately
- The biggest factor in measuring how long it will take for a business to sell is its asking price.
- The average multiple for small business sales is about 2.5 x its earnings or adjusted owner benefit.
- The first thing to do when valuing a business is determining the adjusted owner benefit.
- This often involves much work on the part of the business broker and is not readily known by most business owners.
- After determining the EBITDA (or Earnings Before Interest, Taxes, Depreciation, and Amortization) by examining the most recent financial statement, it must be adjusted to reflect the true economic profits derived by a working owner of the business (i.e., adjusted owner benefit).
- Such adjustments include adding back any personal expenses of the owner that flowed through the financial statement, unrecorded cash (dependent on the industry), the owner’s salary, and any other non-recurring costs that would not be applicable for the buyer.
- The multiple then used to value the business must be considered within the context of the industry, and by the scalability and size of the business.
- Business valuation multiples depend on a number of different factors.
- The company’s competitive advantages, or its ability to offer a product or service more cheaply or better than its competitors, ultimately drives business valuations.
- Valuation factors include a company’s location, established history, goodwill with customers, brand name, leasehold rights, physical or tangible assets, margins, management structure (without needing the owner’s involvement), and the transferability of the assets to a buyer.
- Every facet of the business should be carefully analyzed in order to price a business appropriately.
- This will maximize the seller’s asking price while ensuring it sells within a reasonable time frame.
- An egregiously overpriced business is quite unlikely to sell (if ever) within a twelve month time frame.
The process of selling a business should not be burdensome for a business owner. A professional business broker should handle the sale confidentially so that the seller may run her business without disruption up until the moment of closing. An appropriately priced business with transparent financials and a post-closing transition plan in place typically sells within a 6-12 month time frame.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.