How to sell very small business (or even if)

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OldTimer
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How to sell very small business (or even if)

Post by OldTimer »

25 years ago my wife and I started a property management business specializing in Homeowner Association management.

I am involved in other businesses now, this question is really about her company now.

We would like to retire in 2 years.

She works out of the house ( our home was built with a dedicated office area, about 1,000 sf) and grosses about $170,000 per year, net is about $100-$110,000. While it offers flexibility, it limits any travel to 0%.

The business could grow, we are constantly being asked to take on new projects, but decline since she does not want employees. An aggressive person could easily increase the gross revenue.

We would like to sell the business but don't really have an idea how to do it.

Any advertizing would be bad as what would prevent her client's from being taken by the competition?

Some of her clients have been with her for 25 years, others 10-15 years.

We have thought about bringing in a "partner" for a year or so, then phasing out.

Also, how do we value the business? We have seen multiple concepts of 1.4 to 2.0 of net. Does this mean the business is worth $140,000 to $200,000?

Would business person pay $200,000 to generate $100,000 annual income? Seems like a steal to me. It is a full time position.

We don't really want to finance the purchase as a new poor owner could wipe out our past business relationships.

But maybe a 75% cash and 25% buy out over 2-3 years would be possible.

We would hate to just walk away with nothing.

Any thoughts would be appreciated.
psteinx
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Re: How to sell very small business (or even if)

Post by psteinx »

My quick, relatively uninformed reaction:

What you describe sounds to me more like a (relatively high paying) "job" than a "business".

Someone who possesses the varied skills, experience, and so on to run this job/business successfully probably has the skills and experience to find a job paying almost this much.

I'm skeptical that there are a lot of folks out there good enough to do this, eager to do this (where this is an upgrade to their current job/business), and who also possess ~$150K in savings to buy this business. As a further, perhaps even shakier speculation, I doubt most typical financial institutions would be excited about financing such a thing. I doubt there are many assets attached to the business, beyond relationships, know-how and the like.

That said, I *do* think you could probably find a buyer for the business, BUT on far more flexible financial terms, with some kind of owner financing and/or some kind of profit sharing with the new buyer over a phaseout period.

Consider two small business: yours, and a laundromat with similar sales and income figures. The laundromat likely comes with physical assets with some resale value, plus it can probably be managed part-time by the owner, using relatively unskilled workers. The laundromat feels to me like a more conventional business - where there is something more solid to be sold.

That said, perhaps the growth potential of your business would excite a would be buyer. (That said, I would think most small business owners see growth potential of some sort in their businesses).

I would think your other concern (about competitors finding out about a looming sale) could be somewhat mitigated by using a business broker, not advertising all the details in the main listing, and the use of NDAs and such. That said, it is possible that competitors could find out about a looming sale.
Last edited by psteinx on Mon Jan 28, 2013 3:10 pm, edited 1 time in total.
psteinx
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Re: How to sell very small business (or even if)

Post by psteinx »

Feh - a quicker, shorter response:

Talk to 2-3 business brokers in your area. I would think they could give you a fairly reasonable idea of the sales value and potential of the business.
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Steelersfan
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Re: How to sell very small business (or even if)

Post by Steelersfan »

What type of contract do you have with the HOA's, specifically what is the termination clause?

Are there any Real Estate Management companies that you could sell to in your area?

They would have the expertise and probably the cash to make a deal happen.
MnD
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Re: How to sell very small business (or even if)

Post by MnD »

OldTimer wrote: We have thought about bringing in a "partner" for a year or so, then phasing out.
Someone I know is doing this with their somewhat similar small business that they've run for decades.
The partner and buyer is a just retired military officer so only in his mid-40's and needs/wants to establish a civilian career.
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RenoJay
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Re: How to sell very small business (or even if)

Post by RenoJay »

I sell internet businesses and while not exactly the same as your business, I can explain how buyers think. The biggest questions in their mind are:

1. How much net income will I (the buyer) receive on an ongoing basis
2. How much work is involved

Your business sounds great, but I wouldn't be surprised if that's based in large part on relationships your wife has created over the decades. There is discernible risk for the new owner that those relationships will go away when your wife exits. Furthermore, it sounds like a full time job which will reduce the value to the new owner.

I agree with the poster who suggested talking to some business brokers. Regardless of your asking price, I think the final price will likely end up around 1.5x - 2x what you earn in a year. Depending on the buyer there will likely be some caveats. If the buyer is another property management firm, they may pay most of the price in cash but have some sort of "hold back" contingent on the contracts renewing in a year or so. If the buyer is not a competitor, they may want similar financial arrangements as named above, but will likely also want some sort of gradual phasing out of your wife from the business so clients can get accustomed to the new owner while still feeling like your wife is around as necessary.
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OldTimer
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Re: How to sell very small business (or even if)

Post by OldTimer »

Thanks everyone for theor advice.

What appears to be reasonable is a combination of some cash up front, a monthly payment based on "held" management under contract and a phase out of my wife's responsibilities.

The perfect candidate would be a person with the appropriate experience, maybe working for a similar larger company, who wants to go out on their own.
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Re: How to sell very small business (or even if)

Post by KyleAAA »

Alternatively, your wife could grow the business significantly in the next 2 or 3 years, hiring several employees and taking on new clients accordingly. Once you have employees around doing most of the actual work, you have a much more salable asset.
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dm200
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Re: How to sell very small business (or even if)

Post by dm200 »

What about being "acquired" by a competitor? You would heve to be very, very cautious about discussions with such competitirs, but I suspect there are ways of having them come to you with offer(s).

Perhaps some initiative on your part in some expansion, taking on new custiomers, etc. might get the competetition's attention.
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Re: How to sell very small business (or even if)

Post by RenoJay »

I'd caution against trying to choose your buyer ahead of time (i.e. "a competitor" or "someone in the industry.") When you hire a business broker, he/she will advertise your business in several marketplaces such as bizbuysell.com. The buyers will find you and will tend to be self-selecting and it will be at your own peril to try to pre-qualify them too much. They may have skills or synergies they don't disclose to you off the bat, and their money is just as green as anyone else's. I'd suggest being serious and open with anyone who inquires, and be prepared to do some training in the event the new buyer doesn't have all the skills required out of the gate.
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Re: How to sell very small business (or even if)

Post by bungalow10 »

If you subtract out the wages your wife would earn should an employee run this business, the actual profit of the business is likely much less thank $100k.

I was working closely with someone who wanted me to buy his business last year, only the price he was asking would have been the equivalent of me working for free for two years - no thank you. That sounds a lot like what you are thinking this business is worth too, when in reality you have a client list and some good will for sale.
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OldTimer
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Re: How to sell very small business (or even if)

Post by OldTimer »

To all you helped me with some advice.

My wife has sold her business, all contracts signed and an effective date of January 1, 2015.

Actually we did not sell the business, just the goodwill.

Actually received 2 offers.

I agreed with Bungalow10, the sale is a client list and goodwill.

First offer was twice the offer we selected.

However they had no experience and no cash. They wanted to pay down the road. That looked like a real train wreck in a few months.

The selected offer was from a competitor, as was suggested on this Board by DM200. Thanks.

Competitor is abot 7 times the size, easy for them to assorb DW's clients.

Final number is a little higher than about 1.0 times annual salary and profit.

Competitor signed, gave a personal guarantee and pays monthly for 2 years.

We are very satistfied on he deal.

All my wife's clients have also agreed to sign new contracts with the acquirer.

Thanks to all whp provided input.
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dm200
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Re: How to sell very small business (or even if)

Post by dm200 »

OldTimer wrote:To all you helped me with some advice.

My wife has sold her business, all contracts signed and an effective date of January 1, 2015.

Actually we did not sell the business, just the goodwill.

Actually received 2 offers.

I agreed with Bungalow10, the sale is a client list and goodwill.

First offer was twice the offer we selected.

However they had no experience and no cash. They wanted to pay down the road. That looked like a real train wreck in a few months.

The selected offer was from a competitor, as was suggested on this Board by DM200. Thanks.

Competitor is abot 7 times the size, easy for them to assorb DW's clients.

Final number is a little higher than about 1.0 times annual salary and profit.

Competitor signed, gave a personal guarantee and pays monthly for 2 years.We are very satistfied on he deal.

All my wife's clients have also agreed to sign new contracts with the acquirer.

Thanks to all whp provided input.
Glad it seems to have (so far) worked out well. IMO, getting the personal guarantee is very important. I also agree that the larger offer, but no cash and no experience would likely be a train wreck yielding nothing financially, but a lot of headaches as well.
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