I Spent 10 Years Watching People Buy & Sell Businesses - here are 6 things I learned

In 2012, I started a business while attending university, and wanted to sell it shortly after. Unfortunately, I hit a ton of barriers. Brokers thought my business was too small. Realtors would rather sell a house, and the overall user experience on the internet didn’t give me the confidence I needed.

So, I did some research and uncovered some interesting global trends: First, many people were already thinking of moving away from their 9-5 to become their own boss (this is more obvious today); tons of baby boomers were in the pipeline looking to exit; confidence in franchising was up, and foreign investors were looking to buy established North American businesses to expedite immigration approvals. Shortly after analyzing my research, I set out to create a seamless, supportive, and resourceful platform where anyone looking to buy or sell a business in the micro market could connect (BizON - now known as BuyAndSellABusiness.com).

Selling a business takes hard work, preparation, self-awareness and openness, especially in the micro market, which is defined as businesses looking to sell for under $5mm. Overall, the purchase and sale experience is humbling and rewarding, while testing you mentally and emotionally.

I spent 10 years studying the connections made on my platform BuyAndSellABusiness.com – that’s over 3,400 connections with a transaction value of $2.5b+. Through my research,?I identified six key principles that can help buyers and sellers work towards a smooth and successful purchase and sale experience.

1. Timing plays a massive role.

As a buyer you need to identify trends and ensure that timing is on your side. You need to think about what direction the world is going and how you can add value to it through this acquisition.

We use a model called S.E.T. to audit the business environment. You should review social, economic and technology trends to understand how the acquisition would be positioned, and how unique or big the market is. This is what you need if you want to devote your life to operating and building a great business. The truth is markets change, consumers change and technology changes, all of which can hurt or boost the valuation/opportunities of businesses within certain sectors.

In the end, buyers shouldn’t buy a business for “today”, they should buy a business for future opportunities.

2. Don’t glance over the business model.

You need to find a profitable and growing business, with recurring revenue year-over-year. The revenue should also be diversified to mitigate risk (different products, services, etc). You should also ensure financials are up to date, organized, and prepared properly.

Most buyers want to see three to five years of financials in order to apply some sort of normalized projection (valuations will be based on the financials more than anything else, and most buyers won’t care about the amount of “cash” you make, they want figures they can validate).

So, sellers, if you’re thinking of selling one day, please be less aggressive with running a ton of perks through your business. Yes, it can minimize taxes in a given year, but it reduces profit and also reduces the valuation of your business when it comes time to sell. No one will take your word for it, or at least a savvy buyer will not.

So, question those financials, question the business model and make sure that the financial performance can be upheld in the foreseeable future.

3. If the owner isn’t replaceable, then they’re a liability.

This is important. A business for sale can’t be dependent on one leader, one employee, one supplier, or one customer. No buyer wants to enter a business with the fear of losing a dependent stakeholder that will jeopardize operations, and evaporate revenue and profits. This concept sounds pretty straightforward; however, many business owners disregard it. In my experience, less dependency in business operations equals a more valuable and sellable business.

Creating a self-sufficient business is simple but it takes work. You need to develop principles, processes, and core values that will allow your team to operate and make decisions without you. You need to diversify your client list and suppliers. One client should not generate more than 10% of your revenue and you should ideally have multiple revenue streams. One supplier should not be responsible for delivering more than 10% of the items/services on your supply chain. Every business varies, but this is a simple rule of thumb.

4. An offer means very little.

Don’t get too excited about the non-binding offer. A non-binding offer?lays out the fundamentals of a deal and has a layer of protection (NDA clause) for negotiating parties in case the deal collapses during the negotiation. A non-binding offer means any of the parties can voluntarily withdraw from the contract before the signing of the binding agreement.

The reality is, only 40% of offers through our platform end up with a fully executed purchase and sale agreement. The industry average is 25%. So, that means that 60%-75% of offers fall through the cracks, and this usually happens in the last mile. Why? There are a few common reasons: the buyer didn’t get their financing in order; the buyer got cold feet; or the buyer uncovered skeletons in the closest during due diligence.

5. Brokers are overkill.

Having a broker represent deals in the micro market is overkill. Most brokers don’t want to service micro businesses because the deals can be time consuming, and the commissions aren't commensurate with the amount of time and effort. The reality of business brokerages is that those who succeed move upstream as soon as possible. This isn’t a bad thing. There are still some great brokers in the micro market, however, they are being unbundled before our eyes. Many great businesses are creating Valuation & Financing Tech, Buyer Verification Tech, Due Diligence Tech and Escrow Tech. Our platform is focused on Purchase and Sale Tech and we’re really owning this space. In the end, the future of the Micro M&A space is inclusive, self-sufficient and tech-enabled.

6. Deals aren’t complex, they are disorganized.

It’s not that deals in the micro market are complex, it’s just that they're often disorganized. Communicating and exchanging important documents during an M&A process can become chaotic, coordinating externally and internally, between buyers, sellers, lawyers, accountants and bankers.?This results in long email threads that take forever to load, in addition to getting thrown into different folders in your inbox to stay sane and become difficult to reference as you are going through?diligence. On top of that, sometimes it’s difficult to remember what tasks are pending and where you’re at in the process, all of which is overwhelming. From this pain point, we launched the first digitized and automated purchase and sale experience aimed at organizing deals and guiding buyers and sellers through the entire purchase and sale experience, from offer to close, in a secure environment.

Sellers need to be prepared and organize all documents that a buyer will want to review. It is also vital that both buyers and sellers communicate clearly and effectively. Through our easy to use Deal Rooms, users can chat, exchange documents, request, send and accept all necessary funds, in addition to connecting with our deal support partners if needed. The goal is to give both parties full control of the deal from start to finish, while saving them tons on commission.

I truly believe that a stronger economy and better future depends on people waking up loving what they do, waking up fulfilled and waking up happy. I know that business ownership or a successful exit are viable paths towards that. In the end, happier and fulfilled people make the world a better place. I hope these principles can guide you and help you achieve your goals.

Let's continue,

Nunzio Presta

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Nunzio Presta?is the Founder and CEO of?BuyAndSellABusiness.com, an online marketplace where people can buy, sell and grow businesses or franchises every day.?Join?our growing community today for free.

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