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Managing The Sale of a Business: Expectations vs. Reality | Tresle

Selling

When business owners decide to embark on the journey to sell their business, they oftentimes have predetermined expectations about how the sale process will take place. These expectations can stem from all sorts of places; speaking with friends that have sold (very often regardless of whether their friend’s business was in the same industry or maturity stage), reading something in passing, their own personal financial needs, or let’s face it, pure conjecture. However, the reality of selling a business can be very different from expectations. Business owners generally have strong industry knowledge as it pertains to their business, but often very little hands-on experience selling a business.

In this article, we will share some of the common differences we see between what business owners think they know and what actually takes place. 

 

1. Timeline


Sellers tend to think that the second their business hits the market, a buyer will be waiting at their doorstep ready to transact when, in reality, that is not the case.

Selling a private company is vastly different from transacting in the public market. For example, Google’s stock is bought, sold, and repriced every second of every day that the markets are open. A successful sale in the private market, however, will ultimately be a function of the total number of highly engaged & truly qualified buyers that are brought to the table competing to be the next owner. In other words, when selling a private business, a market must be created and this can take time and indeed patience. 

Price

Having a skewed reality of a competitive landscape and where a company stands in that mix is the number one misunderstanding business owners have.

To avoid having unrealistic selling price expectations, the seller needs to educate themselves and truly understand how other comparable companies are being recognized in the marketplace. If several companies within the same industry, size, and location, sold for an average of 3 times EBITDA you will need a strong, tangible argument to why your company should be valued much higher (ex: faster growth, lower customer concentration, superior/protected technology, etc.)

 

2. Buyer Type

Many sellers believe they have an idea of who their perfect buyer is. The reality is, however, that nobody has a crystal ball. Still to this day, it can surprise us who the buyer is for a given business. 

This thought is likely due to the fact that the owner has rubbed shoulders with potential buyers in the past. People they’ve met at conferences, mutual connections, someone who has perhaps expressed a passing interest, and that thought is carried forward. 

The ideal buyer may be a local investor, an investment group, or even a competitor. When considering selling a business, one must cast the widest net possible and from there whittled it down repeatedly. It is only through this process that one can find the buyer best suited for the transaction. 

 

3. Business Condition

One of the most common mistakes business owners make when selling their business is waiting too long. Sellers often assume that their business needs to be in "perfect" shape in order to sell it. They will often hold off to show higher sales, lower customer concentration, higher profitability, etc., as the list goes on. This logic makes sense; sellers have spent years building their business and this pursuit of improvement is woven into their DNA. 

While these improvements have a chance to make the business more attractive, buyers buy businesses for different reasons. Our experience at Tresle suggests that fortunes are made by selling too soon. In other words, a business is never going to be "perfect" and you can never time the market. Too often we see sellers work tirelessly to groom their business and miss out on market opportunities. They'll work for years to get it where they feel it needs to be only to have the market shift and have their business lose ground (ex: COVID-19). The best time to sell is when things are going well in the present moment. Selling a business is about understanding and capturing the current market conditions and not attempting to predict the future. 


4. Deal Structure

A lot of sellers assume that the majority of deals are structured as 100% buyouts. Unfortunately, the world isn’t that simple. There are a lot of ways to get a deal across the finish line. In order to reach the finish line, it is not uncommon for the buyer to creatively structure the deal in a way that the seller has an interest in the future success of the business. This can be done in a number of ways. Some of the popular ones include: earnouts, seller notes, majority recapitalization, management contracts, bonuses, etc. 

Remember, the price never makes a deal, terms do. 


5. Post-Close Role

A lot of sellers assume selling a business means they close the deal, receive their money, the buyer gets the keys, allowing the seller to exit immediately afterward. While this can happen, it is a rare occurrence. Typically, it is expected that the seller remains active with the company for an agreed-upon period of time to help transition the business. Sellers are often crucial to their company because processes are rarely formalized, and the relationships that sellers hold are key. 

It is an important exercise to consider your expectations for selling a business and challenge them with the realities that others have faced. With the right mindset and education, you can overcome whatever hurdles head your way, work towards a solution, and ultimately, successfully close the deal.