When it comes to selling a small business, there are a wide range of options to you. Narrowing it down, these fall under one of the following:
- Selling your business yourself
- Selling through a third party advisor
Over the years, I have spoken to thousands of buyers and sellers of online businesses. Some have only ever bought or sold privately, others have only ever bought or sold through a third party such as a broker. It is also not uncommon for clients of FE International to attempt to sell themselves first and then retain our services after they have been unsuccessful. I’ve put this post together to go over some of the things I regularly hear or get asked from those selling themselves and my usual responses.
How Can I Sell My Business Myself?
This question comes up all the time on discussion forums, blogs and podcasts. Quite rightly, many entrepreneurs are confident in their knowledge of their own business and back themselves to be able to sell it without help.
For a small business, the three most common options are:
- List it for sale privately
- Sell to a competitor or strategic buyer
- Sell it to an employee
Listing Your Business for Sale Privately
“This is the easy way! All I have to do is put some information together about my site (I can even copy some brokers to see how they do it) and list it on a popular business for sale marketplace. The enquiries will come streaming in and it will sell in no time. Right?”
Unfortunately, this is not quite the case.
The best place to list a small business for sale is BizBuySell. It is used by brokers, private sellers and anyone looking to get in front of business buyers. Unfortunately, if you only have one business to sell, you have to stand out against everyone else on there. Sure, you can buy all of the listing upgrades, but how many enquiries will you get? What do you think? 100? 200?
I ran some numbers from our own internal data… the average listing (across everything we’ve ever put on BizBuySell) gets a grand total of 18 enquiries. And we like to think we’re pretty good at what we do! You then have to take into account all of the duplicates (those who blanket apply to get information on everything), the time wasters and those who aren’t qualified (don’t have the cash) and the number is even lower. To put it in perspective, the average sold listing at FE International receives over 200 qualified enquiries.
Why do brokers use BizBuySell then? What’s the secret? There isn’t one. For a broker, the compounding effect of 15-20 enquiries per listing adds up over time (we will sell around 100 different businesses this year). It takes time to build up trust with a buyer, and often people who first enquire on a listing end up taking over a year before they decide which business is right for them. If you’re selling businesses regularly, this can be economically viable, but for a private seller wanting quick results, this is not really much use.
Failing BizBuySell, you could also try Flippa. This is quite often suitable for websites under $20,000 in value. However, at Flippa you have to pay a listing fee (plus upgrades) and then a 10% completion fee when it sells. Hardly worth selling a business yourself if you have to do all the work AND pay a success fee to a marketplace!
Assuming you don’t manage to find a buyer on a marketplace or classifieds site (you could also try niche forums, Craigslist, BizQuest etc.) then how else do you find a private buyer? Unless you already have a great network, the answer is “with difficulty”.
This seamlessly moves us onto the next option.
Sell Your Business to a Competitor or Strategic Buyer
“Facebook bought Instagram for $1 billion, I read it on TechCrunch. Surely they would be willing to pay a meagre $100k for my website?!”
Unfortunately, this is also not always the case. Whilst strategic sales do happen, they tend to occur when you are least expecting it. They will be the one approaching you rather than the other way round. And even then, the deal terms might suck!
I have been speaking to a friend who has been trying to sell his website for a while now (I’ll keep the name and business private). I check in from time to time to see how he is getting on. A brief timeline of events:
March 2014 – Strategic buyer approaches with a great offer (on paper). All to be paid in stock. By the time they had got anywhere with due diligence, the value of the stock had halved, so the deal fell through.
May 2014 – Another offer came in. Didn’t pan out.
June 2014 – Another offer came in. This time the offer was cash. Great!
July 2014 – Final agreement reached. Awesome!
April 2015 – Deal falls through. Buyer had changed offer from all cash to all stock.
That whole process has taken over a year and still no tangible progress finding a strategic buyer.
When representing clients at FE International, we always reach out to potential strategic buyers (but keeping information about the business private). Sellers are often convinced that their competitors or strategic buyers are willing to pay more than the market. In my experience, this is very rarely the case.
Buyers and investors do look for synergies, but it is very rare for a cold approached entity to buy. They usually don’t have the time or the cash, and if they do, the value they see in the business being sold is not the same as investors (who are generally just interested in the underlying financials). From their perspective, they also have the experience to be able to replicate what you have done for cheaper than the cost of buying you outright.
One of the biggest issues attempting to sell to a strategic buyer or competitor is the amount of information you would need to give away in order to get them interested in making an offer. This is why we stick to buyers looking for investments – they are less interested in copying businesses and more interested in cashflow. Competitors are more than happy to learn more about your business only to change their “offer” terms at the last minute. And assuming you only had 18 enquiries from BizBuySell, you probably don’t have many other options or leverage. Do you take the worse offer? Or take the risk to try sell it to someone else? How about an employee? Great idea!
Sell Your Business to an Employee
Who else better to take over a business and run it successfully than an existing employee or managers? Management buyouts constitute approximately 10% of business sales in the $5-$25m range. Below $5m (the range we deal with at FE International), that number is much lower.
It’s very rare for employees within a business to have the cash themselves, so raising capital is their only option. This can take time (usually months or even years). Unless the owner is willing to finance the deal themselves (let the employees pay a small amount in cash and then finance the rest over 3-5 years) then this is rarely something that amounts to anything. In the <$5m range, it’s too small to be of interest to investment banks or most institutional lenders (who would be the main sources of finance in the $5-25m range).
Let us assume they do have the cash or can raise it, would they be the right buyer of the business? Can employees make the shift to business owner entrepreneurs? I know if it was the other way round, I wouldn’t be able to do it!
An alternative to selling at all would be to step away from the business entirely and promote an employee internally to a senior position like CEO. Many people decide to sell their businesses due to lack of time and other commitments, so this is not always the worst option. You keep the business and its cashflow and don’t have to worry about the day-to-day.
I found a Buyer! Give me the Money!
It is not impossible to find a buyer for a business yourself. It is likely to take time and be a stressful process, but it would be unfair and biased to imply it doesn’t happen.
Once you have found a buyer and you’ve agreed deal terms (hopefully with a signed LOI) you then need to complete due diligence, get a purchase agreement negotiated and signed and then setup escrow and transfer everything. Easy!
In reality, it’s tough, especially if you (or the buyer) has never done it before. This is the stage where a good broker will add a lot of value.
Most brokers will have a lean and hands on due diligence process (we have a secure deal room for data sharing) to maximise speed and efficiency of closing. Knowing what is (and isn’t) acceptable during due diligence is something that comes down to experience. Selling yourself is more difficult. It would be impossible to write down everything that is and isn’t acceptable in this post, but ultimately it comes down to being comfortable and being confident the buyer is asking the right questions to finalise the deal rather than fishing for more information only to change deal terms at the last minute (not as uncommon as you would like to think when selling privately).
Once you have the hard part out the way (due diligence can take time!) then you’ll move onto contract negotiation. If you have opted to sell yourself, you will probably need to speak to an attorney with experience of representing clients selling internet businesses below $5m to draft a contract. This can get expensive but is essential if you don’t have a broker representing you with experience drafting legal agreements. It is important to find an attorney who is fair and balanced – attorneys who try to be too one-sided often kill deals. Ultimately, you want to come to an agreement that is fair for both parties. Trying to create a deal that just suits you as the seller and is unfair on the buyer is going to reduce the chance of the deal closing and increase the chance of issues beyond the sale with disputes over the contract.
Finally, onto closing. This is actually one of the easiest parts of the deal. You know the business better than anyone else and hopefully you have found a buyer who knows what they are doing and doesn’t need too much hand-holding. We also use Escrow.com and here’s an overview of the Escrow process and the benefits.
If you would like to learn more about the process of buying (and thus, apply this to selling), I would recommend our Guide to Buying an Online Business which goes over the process in detail. It’s free and shouldn’t take too long to read!
But… I Really do Have a Buyer!
If you do have a buyer or potential buyers lined up, don’t think you cannot engage a broker. Most will agree to “carve out” prospects you have already spoken to (usually at a lower commission). This is a win/win for both parties as you get all of the advantages of working with a broker and remove most of the disadvantages trying to sell yourself. It also saves time for everyone involved.
Okay, Where’s the Sales Pitch? Why Should I Sell Through a Broker?
Whilst I would certainly not want to discourage attempting to sell a business yourself or imply that using a broker is always the best option here are a few benefits vs. trying to sell yourself based on this post:
- More enquiries. A broker who has been around for years will have the compounding effect of buyers from numerous listings. Look for a company that invests in marketing, too.
- One point of contact. No dealing with numerous marketplace listings and unqualified buyers yourself.
- No unjustified last minute changes in deal terms. If the worst does happen, there is more likely to be another buyer.
- Buyers pay cash. Not in stock in an unknown “public” company.
- Speed. No waiting 12 months for a buyer to make a decision. Most deals at FE International are closed in under 3 months.
- No financed deals over years with employees.
- Experience in due diligence, contract negotiation and closing.
- Fairness. It’s a broker’s job to be fair and balanced and ensure a deal closes (unlike an attorney).
- Support and guidance. Most brokers are also entrepreneurs themselves with experience running online businesses. This can be helpful throughout the process.
- Incentive. Brokers have overheads and bills to pay. They want to get your business sold. If you are 100% committed to the sales process, they will be too.
I Want to Sell My Online Business
If you are thinking of selling your online business, we are always happy to give a balanced view on your options. A broker isn’t always best, but it doesn’t hurt to have a second opinion before you proceed elsewhere. Get in touch and we can take things from there.