August, 2009
Feature
Inspection News and Views from the American Society of Home Inspectors



Every Business can be Sold ...

MICHAEL K. SEMANIK

... but some pose a greater challenge than others

Often, business owners reach a point where they want to take their life in a new direction. At that point, most would like to sell their business and be justly compensated for the years of toil they’ve invested. Planning ahead increases the likelihood of a satisfactory sale.

Make your business more transferable

“Transferability” is the ease with which a buyer can step into your shoes and continue earning the same income stream you’ve enjoyed. Many factors influence the transferability of a business. Perhaps, most important is your “brand” or identity in the marketplace. If you are operating as a sole proprietor, “John Smith Home Inspections,” adopt a trade name such as “Dominion Home Inspections” to increase transferability. Similarly, invest in a separate business phone number with which customers and prospective customers become familiar and that can stay with the business when you sell. If you are operating out of your home, rent a post office box in the business name. All of these elements enhance the continuity of your business’ identity in your marketplace, which can be transferred to a new owner.

Document your referral & customer base

Maintain a list of your referral sources. Ask people who call you directly how they learned about your business, and keep records of the answers. Occasionally analyzing these data will reveal strengths and weaknesses in your referral base. For example, if most of your referrals come from one real estate agent or broker, your business could be devastated if this person retired or otherwise stop referring customers to you. Develop multiple referral sources and document them. This will make your business more attractive to buyers.

Similarly, document your customer database. Keep records of repeat customers and the length of time they have used your service. Consider programs that build repeat customers, such as maintenance inspections every two, three or five years. Perhaps you can develop a program of independent, annual inspections for landlords. Once again, the greater the continuity in your customer base, the more attractive your business is to buyers.

Strategic vs. financial buyers

The best buyer for your business is a strategic buyer, someone already in your business, preferably with multiple locations in territories adjacent to yours. A financial buyer is someone from outside the industry who wants to own his or her own business. The main difference between these two types of buyers is their perception of the risk of the investment. A financial buyer will perceive a greater risk of continuing your success than a strategic buyer. The greater the perceived risk of an investment, the less a buyer is willing to pay. In fact, a strategic buyer may well be thinking he can do better than you in your market, and that’s just what you want a buyer to think. Marketing to strategic buyers can be tricky. It is best if some third party assesses a potential strategic buyer’s interest in expanding before he or she learns that your business is for sale.

Depending on your jurisdiction, proper licensing for the buyer may be an issue. Again, it’s not an issue with strategic buyers. If you sell to a financial buyer who becomes newly licensed, you may have to stay around for some time after the sale to help the buyer get off to a good start.

Consider diversifying into other products and services that you can sell to the same customer base. A business with multiple sources of income is more appealing to buyers. Further, multiple sources of income increase the number of potential strategic buyers.

Other thoughts

One difficult-to-sell situation is a one-man-show. If you are operating alone, consider hiring an assistant. Who knows, you may be hiring a future buyer. But even a one-man show can be sold if you have made your business transferable and documented your relationships. You may have to spend more time introducing the new owner to the marketplace than you might with a more transferable business.

For those operating as franchisees, most franchise agreements have clauses that deal with the conditions under which you can sell your business. One thought for this situations is to get an independent estimate of your business’ value to ensure you get a fair price under the franchise agreement terms.

For most people, selling a business is a once-in-a-lifetime experience and the business represents a significant portion of their net worth. Get good advice. Ask your accountant to consider the tax consequences of the terms of the sale. You may learn that receiving all the sale price in cash at closing will increase the government’s take. It is also wise to have your attorney draft the agreements. Attorneys write from a point of view and you want the agreements written from your point of view. Plus, if you end up dealing with several prospective buyers, it is better and less expensive for their attorneys to react to your agreements than for your attorney to react to each of theirs.


Michael K. Semanik is president of Triumph Associates, Ltd., in Charlottesville, Va., and offers valuation, coaching and implementation services for anyone interested in selling a business. Visit his Web site at www.triumphassociates.com.