Tuesday, November 9, 2010

A Tale of Two Businesses by Guest Blogger Ed Cook

I recently listed two businesses of similar size with similar characteristics. Good management, good reputation and priced right. Yet one sold in less than 4 months and one is still for sale more than 9 months after listing. Can you figure out which one sold and which one did not?

Business A - Pet Care Business
$100,041(Cash Flow)
$297,000(Sales Price)
2.97(Multiple - Sales Price/Cash Flow)
$98,010(Down Payment Required)
$198,990(Seller Financing Offered)

Business B - Business Supply Company
(Cash Flow )
$390,000( Sales Price )
2.78 (Multiple - Sales Price/Cash Flow)
$331,500 (Down Payment Required)
$58,500 (Seller Financing Offered )

There was no doubt in my mind that Business B would sell quickly. It had the numbers, the reputation and a great location. I knew that Business A would sell, but assumed that would take a bit more time. Well guess what? The answer is A. That pet care business received 4 solid offers and sold within 4 months of listing, while the business supply company remains for sale 9 months later and has yet to receive one offer. Why the difference? Seller financing.

The pet care business went to market offering terms of 33% down payment with the remainder as a seller note. This opened up a huge pool of buyers, most from outside the industry, and allowed the seller to be selective with both prospective buyers and offers.

The business supply company went to market offering terms of 85% down payment and a 15% seller note. They have yet to receive an offer. Quite simply, buyers are looking to put as little money down as possible. If they are being asked to put down $330,000 on a business listed at $390,000 they will simply move on to the next deal. They will go out and buy a bigger business where the seller is offering financing.

But seller financing offers one more thing to the buyer that is even more important than the financial consideration. When a seller is willing to finance a large portion of the transaction it shows the buyer that the business is sound and that the owner feels it will be successful for years to come. That implicit guarantee from the seller sends exactly the right signal to the would-be buyer.

The business supply company eventually offered up more seller financing but it was literally too little, too late. The buyers had moved on to other deals. Here we sit nine months later with no offers. All because the seller was not willing to offer proper financing.

When you sell your business, offer the proper terms at the proper price with the initial listing. That gives you the very best chance to sell your business.

By the way, the pet care business accepted a cash offer as the buyer sought to differentiate himself from the other offers. It’s funny that the seller that offered financing ended up with cash while the one that wanted cash will end up taking terms.

Ed Cook is a professional business intermediary with Chicagoland Sunbelt. Ed has over twenty years of broad-based experience in every aspect of running a small business giving him the skills and knowledge needed to help buyers and sellers achieve their needs. Ed has been very successful in helping his clients navigate this difficult market. If you would like to learn more about the process of buying or selling a business, Ed can be reached directly at ecook@sunbeltnetwork.com.


Suzanne Gorrell said...

So would you consider sellar financing as a way of enabling you to sell a business?

Domenic Rinaldi said...

Seller financing has become a requirement in alomst every deal. even when there is bank financing, the bank will require that the seller carry some portion in the form of a seller note. It is important for seller's to understand how best to offer seller financing so there is investment is protected.