Words of Wisdom and Inspiration for the Aspiring Entrepreneur from Frank Covich, Founder of the National Association of Independent Business Brokers (NAIBB)
by Frank Covich
The Difference between Selling Homes and Selling Businesses
For more than 35 years I have been teaching the science and art of business transfer consulting (Business Brokerage). During my conversations and lectures I have been asked many thousands of times, How is selling businesses different than selling real estate?
My answer has always been the same. Home real estate sales are based upon fundamental factors: the home size, location, aspects and comparable features as far as valuation. Once a listing is agreed to and a purchaser accepts the price, a closing ensues, and that is difficult to back out of.
A typical business sale has all kinds of different valuation aspects. Example: the value of equipment, the value of inventory, if it’s a manufacturing business? What is the value of finished products and products in production? Employees are an asset to its continued success. Will they stay? Will this dynamic change in a turnover? Management is always a factor in any business sale, and therefore so are the details with regard to transition training of new owners. The business might have a lease, and the value of that lease can be either an asset or a liability. Many valuation techniques can be applied in order to ascertain what a business is worth. Sales trends, profit margins, the cost to replace equipment and insurance valued against what new equipment would cost…these are just a few. Many vital questions need to be asked: Does the business have valuable patents? Does the business have a large collections problem? Does the business have any lawsuits pending? What about tax issues? Does the business maintain clear financial records? And the list goes on and on. Additionally, these valuation parameters can change dramatically during the course of selling a business.
The classic real estate broker will try and list a home in a neighborhood. List means to get a contract to promote and sell a building/structure. A licensed real estate broker will research the selling valuations and current deals on similar homes in the area, and they will use that data along with square footage details, the number of bedrooms and other standard home features, as well as special features like a pool, to set a price. They will also look at the comps in the area.
Once the homeowner agrees to contract with the real estate broker, the broker will usually post the home on a multiple list telling everyone this home is for sale, asking people to see it and make an offer. A home buyer will use some of the same data to arrive at an asking price, submit it through the broker and in most cases if the price meets the asking price, the deal is done upon financing and approval. Sometimes active negotiations will take place. If the deal is accepted and the property has a clear title, the home is title transferred and the broker gets the agreed upon commission.
The process of selling businesses is vastly more involved, as referenced above. Having been involved in thousands of business transfers throughout my career, I can tell you that business valuation is a complex process, one that can involve a number of other players, such as equipment appraisers, tax reviewers, etc. Brokers can apply different valuation systems and or seek help in setting a good asking price with the help of many financial professionals. Sometimes an owner will have a price in mind, and that might just end up being the asking price, but always, always, a buyer will require inventories and an appraisal process.
Every business-for-sale situation requires what I call a business profile (an overview of what is being sold), an examination of the business’ history as well as where it is headed and why. The profile can provide detail on some of the assets being sold, information on key employees, crucial product details and statements of why it is a good business to purchase.
I show my clients how to do all of this and more. Sellers pay to have the profile put together, knowing that by having the profile in hand, brokers will have a 500% better chance of getting someone to learn and get excited about buying the business. Buyers will feel good about how the business is organized and presented. Profiles get business owners to buy other businesses. Business profiles when properly done will tell the story the will result in success, and they must be done well in advance of starting any sales campaign. Working without a profile makes any business transfer very difficult.
Overall, it has been my experience that the typical real estate person, absent the proper training, has a difficult time selling established businesses. The valuation process is totally different. The marketing and sales process is totally different, and the closing process is different in every case.
For more information about my program for expanding into the science and art of business brokerage and how to do so both economically and with total confidence, please visit www.bebizbroker.com.
Get involved, be proactive and remember how important it is to do your comparison research.
All the best,
December 7, 2018