BizBuySell survey of small business owners and business brokers shows many owners are unaware of what to expect when it comes time to sell their businesses.
San Francisco, CA – BizBuySell, the Internet’s largest business-for-sale marketplace, released a new study on how small business owners’ perceptions of the sales process compares to what business brokers actually see within the market. The survey, which polled more than 500 small business owners and 300 business brokers from across the nation, revealed some key gaps in owner expectations compared to broker experience and insight.
Owners Say They Want Best Fit Buyer, Brokers Say Money Wins in End
When it comes time to sell a small business, one of the first steps a seller takes is to determine their top sale goal. The survey findings highlight a disconnect between small business owners’ highest sale priority and brokers’ experience. Forty-one percent of small business owners listed “a good buyer fit (future success of the business)” as their top sale priority, while an identical 41 percent of brokers said getting the best price is the main goal when approached by sellers today.
Brokers are also more than twice as likely as owners to believe the primary value of using their services during a business sale is their “effectiveness in getting the owner more money.” Sellers, on the other hand, put more emphasis on brokers’ networks, with nearly half (47 percent) listing it as the main driver for using a business broker.
“While owners are still engaged in their businesses day-to-day operations, it makes sense that they would prioritize buyers who can continue running the venture successfully,” Bob House, Group General Manager of BizBuySell.com and BizQuest.com, said. “At the same time, brokers see the variables that often win in the end. Finding the right fit is an important goal, but it’s likely that many owners will have a tough time passing up a larger check.”
Owners and brokers had slightly different thoughts on seller motivations as well. While both sides listed retirement as the most common motivation for selling a small business, owners were much more likely to list another venture (28 percent), and boredom or burn out (16 percent) as the most common motivations compared to brokers (12 percent each, respectively). It’s likely that owners personally relate to these other options and, therefore, believe they are more common.
Owners Selective in Finding the Right Buyer, Brokers Say Now is a Great Time to Find One
Small business owners were hesitant to put their businesses on the market for severalyears during and after the recession, likely waiting for a more stable economy to drive up prices down the line. Even with the recent economic rebound, some owners still believe there is a lack of qualified buyers in the market, despite broker sentiment and BizBuySell data suggesting otherwise.
Not only did the majority (54%) of small business owners believe that less than half of interested buyers are qualified, owners were also four times more likely than brokers to blame a lack of qualified buyers as the reason small businesses remain on the market for an extended period of time or don’t sell at all (22 percent v. six percent). The majority (62%) of brokers, on the other hand, said that over half of potential buyers are qualified, with 25% indicating that more than 70% of interested buyers are qualified.
Recent data supports brokers’ confidence in today’s market. According to BizBuySell.com’s First Quarter 2015 Insight Report, small business transactions continued a two-year trend of robust activity in the business-for-sale market and key financial indicators suggest the improving health of small businesses in general. It appears brokers have a valid confidence that there is a large pool of buyers ready to dive into entrepreneurship and take over for sellers, whereas owners may have unrealistic expectations when it comes to business value or the finding the right fit.
In fact, a majority (58 percent) of brokers blamed sellers’ unrealistic expectations (e.g., asking price is too high) as the main hurdle to sales today. Another 31 percent said the business’s financial health is the top reason businesses don’t sell or remain on the market for a long time, highlighting that owners need to have the financial performance to support their asking prices.
Opinions Vary on Sale Prices and Financing of Small Business Sales
Traditionally, most small businesses don’t sell for their exact original asking price. Owners and brokers generally agreed that this is the case, but brokers were much more confident they could get the final price pretty close to asking. Sixty-nine percent brokers say the final sale price of a small business generally falls between 80-100 percent of the total asking price. Only 54 percent of owners believed the same. This discrepancy could be attributed to brokers’ expertise with business valuation and the negotiation process, meaning owners who work with them are likely setting more realistic asking prices in the first place and are then able to justify those prices at the negotiating table.
Once a sale price is agreed upon, the next step in a small business transaction is determining the buyer’s form of payment. During the Great Recession, seller financing (payment in the form of a term loan) became an essential component of closing transactions since many buyers lacked the capital necessary to pay upfront.
Even though the economy has picked up, the majority of brokers (74 percent) still believe seller financing is either essential or important to closing deals today. By comparison, just 58 percent of owners believed the same.
Finally, owner-broker expectations also differed around loan payoff timelines. 36 percent of owners optimistically believed a loan would be paid in less than two years, while the majority of brokers (68 percent) said most loans are paid in three to five years.
Owners Need to Be Aware of How Long it Takes to Close Deals
Estimating how long a business sale process will take can be challenging. It depends on a variety of factors, including industry, location, finances and more. Most surveyed owners seemed optimistic regarding their sale timeline. Nearly half (44 percent) believed the entire process would be finalized in less than five months. Brokers found that to be unrealistic, with a majority (54 percent) saying sellers should set their expectations in the six to 11 months range.
BizBuySell.com’s recent time to sell data does show that small businesses are selling faster than in previous years. Over the past two years, the median time to sell a business stands at about 172 days. While the timeline has expedited a bit (down to 167 days in 2014), it still remains somewhat longer than most owners’ expectations.
“When an owner begins the sales process, it’s important that they research the market and perhaps consult a broker to get a solid understanding of how long the process will last,” House said. “By setting a realistic timeline, sellers can create an actionable plan, complete all the necessary steps, and ultimately, receive the best return for their business.”