Conclusion: The more financing the seller offers, the quicker the business should sell. We believe most deals in the database with less than a 30 percent down payment involved bank financing, which lengthened the amount of time to close the transaction.
Variable #7 - Industry Correlation: The following statistics show the average number of days a business is on the market, broken down by industry type:
Construction (SIC Code 15-17) – 270 Days (9 months)
Manufacturing (SIC Code 20-39) – 244 Days (8.1 months)
Transportation (SIC Code 40-47) – 206 Days (6.8 months)
Communication (SIC Code 48) – 193 Days (6.4 months)
Electric, Gas and Sanitary Services (SIC Code 49) – 247 Days (8.2 months)
Wholesale (SIC Code 50-51) – 243 Days (8.1 months)
Retail (SIC Code 52-59) – 211 Days (7 months)
Insurance, Finance and Real Estate (SIC Code 60-67) – 216 Days (7.2 months)
Services (SIC Code 70-89) – 214 Days (7.1 months)
Conclusion: Only a small correlation exists between the industry type and the number of days a business is on the market. However, much of this data seems to defy conventional business broker wisdom. Most brokers believe construction-related businesses are difficult to sell, and the data supports this long-held belief. However, most business brokers believe manufacturing-related businesses are easier to sell, and the data does not support this belief.
The Top Variables: Below is a chart of the estimated top variables that affect the length of time it takes to sell a business:
Business Brokerage Press Industry Survey – Business Brokerage Press produces an annual survey of its members. The members primarily consist of full-time business brokers. Out of a few thousand members, a large majority complete the survey on an annual basis. Non-members are also permitted to participate in the survey. The survey is mainly aimed at business brokers; however, a number of middle market intermediaries and other advisors participate in the survey. The survey consists of several dozen questions, of which one question is usually “How many months is the average period between listing and sale?” Recent results from surveys have ranged from 6-11 months, with the time period slowly increasing over the years. This data seems to coincide with the data from BIZOMPS. The 2006 results showed an average time period of 7.9 months, while 2011 results showed a 10 month time period between listing and sale.
The Businesses for Sale Survey – In 2008, 62 percent of the business brokers stated that it took them at least 9 months from listing a business for sale to sell it, according to the website Business for Sale (www.businesseforsale.com). Only 28 percent reported that it took 6 months or less from listing to sale. Note that businessforsale.com primarily operates in Europe, which can obviously skew statistics for companies operating in the United States. Nonetheless, they also generate significant activity in the United States.
Here are the results of the survey:
Statistics and Errors – The industry of selling businesses is a highly inefficient market with limited resources, especially for those selling smaller businesses. Almost no surveys are validated, and most producers of surveys lure participants in with free results if they complete the survey. This type of incentive can result in inaccurate data.
For instance, when advertising a business for sale, we use a number of web portals in which we are virtually forced to provide transactional data. Our deal makers operate separately from our back-end administrative team. Unfortunately, our back-end administrative team is not privy to transactional details; however, they are required to enter the data. As a result, they enter inaccurate data. In other words, when given the results of these surveys, we are compensated with transaction data that we already know is inaccurate so we have little incentive to input accurate data. Many other brokers are simply too busy to bother inputting data into databases.
While the data is still useful because it is sometimes accurate, one should remember that it is not without flaws. The data should be used as a guide and supplemented with good old common sense and professional advice.
Other Sources of Information – Another highly useful transactional database, the IBA Market Database, includes over 37,000 transactions. However, the database does not provide details on how long a business takes to sell. Unfortunately, we know of no other useful sources of information regarding the time it takes to sell a business.
A Balanced Perspective – When planning to sell a business, you should attempt to maintain a balanced viewpoint. Remember that an average is just an average. The actual time period can vary from 1 day to more than 3 years.
To illustrate, how long, on average, does it take for a man and woman to marry after their first date? This question seems absurd when trying to estimate when your son or daughter will marry, but many business owners apply this same logic when estimating how long it will take to sell their business. Selling a business is a stressful, emotional event, and it involves anticipating other people’s responses, which is often also emotional. As a result, the data is widely dispersed and estimating the time is difficult.
Value of the Business vs. Time to Sell – Most of the factors that increase the value of a business will also have a direct positive correlation to the amount of time it takes to sell the business. The following factors will increase the value of a business and statistically, increase the speed at which a business is sold: industry type, geographic area, reasonable asking price, seller financing offered, and a reasonable valuation based on a multiple of the Seller’s Discretionary Earnings.
Process for Selling a Business
The following text is a brief description of the steps involved in selling a business and the time-frames involved for each step.
Preparation – Less than 1 month – The step includes preparing the valuation, writing a business summary, and creating other key documents. Preparation is often a controlled and predictable step. However, the time it takes may vary from 1-8 weeks. Often, the biggest bottleneck at this stage is receiving updated financials. Unfortunately, many business brokers take 2-3 months to put a business on the market. In our company, we can prepare all documents and have a business on the market in less than a week once everything is in our hands. When interviewing brokers, it is critical to ask them how long it will take before your business is on the market.
Advertise the Business for Sale – 1-12 months – This step involves advertising and marketing the business for sale and meeting with buyers. How long this period will take is often unknown, and it required little active effort ffrom the seller other than meeting with prospective buyers. This time period is often frustrating for the seller because they may feel like nothing is happening. However, it is important that the seller keeps his or her focus on the business and maintains consistent revenues or growth.
Negotiation, Due Diligence, and Closing – 1-3 months - Negotiating and closing a deal takes from 1-3 months. However, several factors during this stage of the process are unknown. Many buyers are scared to purchase a business, and it can sometimes take them several months or more before they decide to make an offer on a business. Additionally, due diligence can be delayed for many reasons, such as delays with obtaining bank financing or as the result of innacurate financial information. Finally, it can take several months to close the deal due to third-party delays from attorneys, accountants, franchisors, banks, or license transfer approvals. On average, it takes about 1 month to negotiate an offer with a buyer, 1 month to complete due diligence, and 1 month to close the transactions. These guidelines are rough estimates only, and you should fully be prepared for the transaction to take significantly longer.
Below is a list of general factors that affect how long it takes to sell a business. These factors change over the years. However, we believe the following factors have had the most significant impact on lengthening the time it has taken to sell a business in the previous 10 years.
Internet – The internet has provided buyers of all goods and services with more options. Before the internet was popular, most businesses were sold through newspapers. This type of selling created a highly inefficient market, and it was more difficult for a buyer to compare options. Ironically, businesses were easier to sell and often sold quicker, probably due to a lack of qualified alternatives and businesses for sale.
Information – The internet has also provided a wealth of information on buying or selling a business. As a result, today’s buyer is more educated and is often considering more options.
More businessess for sale – Since 2008, the number of businesses for sale has steadily increased. This increase has resulted in a larger number of options for buyers and depressed prices with the possibility of a protracted sale.
Less Demand – Since 2005, Google Trends shows a significant decrease in search volume for the search phrases “buy a business” and “businesses for sale.”
Economic factors – Economic factors have also adversely affected the rate at which small businesses sell. The primary factor that has slowed the speed at which small businsses are bought and sold is overall confidence in the economy. Many economic factors affect small business sales, such as unemployment and interest rates. However, we beleive that a majority of the buyers are sitting on the sidelines while the economic environment improves.
Small business optimism was at an all-time low in 2008 and 2009. The situation has since improved and business sales have picked up.
As more people leave the workforce, more buyers are theoretically available to purchase businesses. Many believe a correlation exists between the unemployment rate and small business sales.
The following is a list of specific factors that may affect how long it takes to sell your business:
Price – The more reasonable your asking price, the quicker your business will likely sell.
Financing – Offering reasonable seller financing terms should result in a quicker sale.
Advertising – Aggressively advertising your business for sale through the appropriate channels should help you sell your business faster.
Geographic Area – If your business is for sale in a high-growth area, then it probably will sell faster.
Industry – If your business is in an attractive industry, such as technology, then it likely will sell sooner than if it is in a low-growth industry.
Financial Trends – If your business is experiencing positive financials trends, such as increased revenues or margins, then your business will be easier to sell.
Specificity of Skills – If your business requires highly specific skills or licensing, such as a professional or healthcare practice, then your business may take longer to sell.
Asking Price – If you own a business valued at less than $2-3 million, then it will probably take longer to sell than a business valued at more than $2-3 million. Ironically, larger businesses are easier to sell due to a higher demand from professional buyers. Almost all larger businesses are purchased by financial or corporate buyers as an alternative to organic growth, and the demand for a quality lower middle-market business is very high. The time frame also depends on if the sale process is a negotiated process or an auction.
Brokers Can Help and Hurt You When Selling Your Business
Why do business brokers often require a 12 month exclusive contract? The listing contract length often coincides with the average length of time it takes to sell a business. Half a century ago, listing contracts were 30-60 days in length, and businesses were often sold within that time period. The time it takes to sell a business has increased steadily over the last 50 years, along with the exclusivity period that most brokers require. Most business brokers invest a substantial amount of time when initially placing the business on the market, and absent a retainer fee, a contractual committment ensures the broker she will have the exclusive opportunity to recapture her initial investment of time and money. We have developed a new approach to selling a business that does not require an exclusive contract. Take a look and contact us if you are interested.
When talking with a broker that works on a commission basis and who also requires an exclusive contract, a natural conflict of interest exists. The broker may be tempted to tell you to sell your business for a higher value than your business is actually worth. He may also be unrealistic with you regarding how long your business may actually take to sell.
What can I do?
Below is a list of specific actions you can take to ensure your business sells as fast as possible:
Valuation – If you are serious about selling your business, then we recommend obtaining either an opinion of value or a formal business valuation. For more information, please see the page about our business valuation options. We can prepare a list of specific action steps you can take to improve the value of your business. These action steps can be taken either right before the business is put on the market, or they can be take several years in advance. It is never too late to prepare.
Exit Strategy – Planning the sale of your business is critical. We can prepare a formal exit strategy for you that examines hundreds of variables and includes a 20-30 page customized plan, along with checklists of documents you need to prepare and specific action steps you can take before putting your business on the market.
Keep Your Business on the Market – Keep advertising your business, even if you have an offer. Don’t take your business off the market until you have a signed definitive purchase agreement and a nonrefundable earnest money deposit.
Financing – Either pre-approve your business for bank financing or offer seller financing. Our exit strategy includes a list of financing options for your business, along with specific suggestions.
Reasonable Price – Set a realistic asking price for your business based on the valuation. Do not set a higher price in hopes of getting lucky. Doing so may preclude many buyers from ever looking at your business.
Prepare for Due Diligence – Prepare for due diligence by organizing a list of documents most buyers will request. Doing so speeds up the sale process and increases the chances of a successful sale. Our custom exit strategy includes a list of dozens of documents and a timeline of when a buyer is likely to request them.
The business of selling businesses is a highly inefficient market. Data regarding business sales is sparse and often innaccurate. However, with our suggestions, you will not only speed the process up, you will also increase the chance of a successful sale.
Contact us anytime if you would like help preparing your business for sale.