Credibility Critical When Selling A Business

Credibility Key When Selling Businesses

In order to establish credibility when selling a business, the business owner – and by extension their business broker – must be trusted and believed by the buyer. By becoming a believable and credible source of information, it is also possible for a business broker to convince a buyer that they should agree to the seller’s desired price and terms. The simplest way to establish and maintain credibility with a buyer is to always be honest, objective, and timely in disclosing relevant information to prospective buyers. This includes disclosures concerning the operational performance of the business and the represented adjusted owner benefit upon which businesses are valued. Credibility mitigates buyers’ concerns over operational risk, owner-dependency, and market volatility which ultimately leads to better price and terms for the seller.

Find Business Broker with Credibility

  • The first way in which a business owner may establish credibility with buyers is by retaining a business broker with credibility.
  • A business broker in Florida must have an active license with the Department of Business Professional Regulation (DBPR).
  • Once confirmed as a licensed broker, business owners may peruse the websites of selected business brokers in order to view their active listings and to ensure that they specialize in only selling businesses.
  • Viewing the active listings of a business broker is very helpful in determining whether they keep the sale confidential while still enticing prospective buyers with key information about the business.
  • Business owners should always select a business broker with demonstrable knowledge of the local market and experience in selling businesses within the industry in which the business operates.
  • Ultimately, the most effective way in selecting a credible business broker is by receiving a business evaluation from the broker and observing how the broker justifies their suggested asking price.
  • Justifying the asking price to prospective buyers using objective data, comparable sales of similar businesses, and the historical financials of the business is essential for the business owner to get the best possible price and terms.
  • Subjective opinions, future projections, and inflated earnings estimates should be avoided when justifying the asking price and only serves to damage the credibility of both the business broker and the business owner.

Transparency Establishes Credibility

Unlike a piece of property, there are many aspects of a business which are not readily observable, discoverable, or apparent to prospective buyers. This is why almost all buyers require a formal due diligence period as a contingency of the deal prior to closing. Formal due diligence involves the disclosure of all available information about the business requested from the buyer. A transparent formal due diligence process with prompt, clear, and good-faith disclosures of all relevant information goes a long way toward establishing credibility and shows a buyer that the seller has nothing to hide. Prior to formal due diligence, a clear and transparent financial statement (which is then substantiated during formal due diligence) that prospective buyers may use to make an offer on the business also establishes credibility.

Maintain Credibility

Maintaining credibility during a business sale involves consistently and promptly answering buyers’ questions about the business in as transparent a manner as possible. Most buyers wish to meet the seller (with the broker) prior to making an offer. During this meeting, the seller should take the opportunity to explain both the positive aspects (such as unique competitive advantages) and the negative aspects (such as new competitors) of the business. It’s always better to be honest and confront any negative trends or challenges which the buyer will discover anyway during formal due diligence. Once formal due diligence starts, the business owner may maintain their credibility by always making a good faith effort to promptly comply with the formal due diligence requests. Information should not be withheld and the business owner should always make themselves available for further discussions.

Example of Maintaining Credibility in Business Sales

  • Roger is selling his Durable Medical Equipment (DME) business, which sells healthcare-related equipment via third party insurance carriers to patients for use in their homes.
  • Roger’s business just got under contract by virtue of a signed Letter of Intent (with a refundable deposit) between Roger and a prospective buyer.
  • A few days after signing the LOI and as formal due diligence is getting underway, Roger receives a notice that one of his major insurance carriers will change their coverage on certain items in the upcoming year.
  • This will result in an approximate 10% loss of revenue for Roger’s business moving forward.
  • Roger informs his business broker who wisely convenes an immediate conference call with all parties so the buyer may hear the news directly from Roger.
  • On the call, Roger explains that insurance carriers sometimes change their pricing and coverage for participants in the DME industry, and that there are no other changes in the pricing or coverage from other insurance carriers.
  • The buyer is obviously not pleased with the news, but Roger’s credibility has been maintained.
  • The buyer still believes and trusts that the purported sales and income from the business (minus the 10% adverse impact from the recent news) will remain intact after the sale.
  • Although the price and terms may need to be renegotiated in the buyer’s favor, the deal itself can still happen and Roger can still sell his business for a fair price.

Most buyers of businesses need to believe in the credibility of a business owner and their business broker in order to ultimately purchase a business. The value of businesses change over time, and the credibility of a business owner always depends on honestly and timely disclosing all relevant information to buyers.

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.