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The Business Buy-Sell Quiz

The most popular part of any talk I give is always the quiz questions. People love to give the right answer! Let’s go through some of my favorite questions (and the answers).

The Top Three Elements to Getting a Deal Done

What are the top three elements to getting a (small, midsized, or lower middle-market) deal done? It’s not price, terms, or cash. While important, they come after the top three, which are:

  1. Motivation: No motivated seller, no deal. No motivated buyer, no deal. For the seller, it can’t be just the money. There has to be an underlying factor like health, retirement, severe burnout, etc. For the individual buyer it could be unemployment, fear of unemployment, or being fed up with the corporate world. For a company buyer, it’s usually because they can’t hit their growth targets organically.
  2. Relationship: If the buyer and seller don’t get along and trust each other there is no way there will be a deal. I tell buyers and sellers, “If your gut tells you something is wrong, step back or walk away.”
  3. Education: This isn’t like buying a house where there’s a sign out front saying, “Come on in and look at me.” Confidentiality rules on the seller’s side so it’s finding a match and dealing with it quietly. Both parties must realize there’s a natural give and take, there will be frustration, buyer and/or seller remorse may set in, and there are set ranges of value based on the company’s size (and sometimes also based on industry).

What percentage of businesses are predicted to sell in the next 10-15 years?

Going back to 2007-2008 we had about eight years of predictions along the lines of, “70% of companies will change hands in the next 10 years.” The 10 years kept rolling forward given a little thing called The Great Recession. This has manifested itself with an increased number of sellers and it’s mainly a demographic thing; baby boomers are a large generation, highly entrepreneurial, and own a disproportionate share of companies. Even if it’s down to 50% over 10 years it’s a huge number.

How many businesses believe they’re ready to sell for maximum value? How many really are?

Twenty-eight percent of owners surveyed said they were prepared. According to the Wall Street Journal, the number is 10% (and this is often confirmed by industry experts).

Do experts say owners should get ready to sell how many years before selling?

The common answer is three to five years. I can’t argue with it for three reasons:

  • This is the number of years of financial information buyers and banks ask for.
  • Actions taken to improve the business take time to manifest themselves and this gives proof (of those actions).
  • The largest enemy of change is inertia. The day-to-day gets in the way so most of the time major plans get bogged down.

In his book, Transaction Patterns, Toby Tatum analyzed done deals. This was published in 2000 so let’s compare what was then to what is now.

Acquisitions, which were financed by the seller, sold for a ____% (median) higher price than all-cash transactions?

The answer then was 31% higher. The answer now is probably “negligible” for deals fitting into the SBA loan program range. And for larger deals, there’s so much money out there for private equity, search funders, unfunded searchers, and others that there’s not a lot of difference.

The average down payment (from the buyer’s funds) was _____%?

It was 37%. Now it’s 10-15% for SBA deals and 20-25% for conventional bank loan deals.

If the seller financed 70% or more of the price the median sale price was ____% higher than an all-cash transaction?

Then: 47% higher. Now, see above, there’s not much difference.

Bonus: The non-financial factors are a huge part of any deal. The typical ones are customers, employees, lease, suppliers, market conditions, etc. What are the new ones, aka Covid factors?

  • Government intervention, i.e., are you an essential or non-essential business, can your capacity be capped, hours restricted, etc.
  • The safety of your employees, the cost, and the potential liability.
  • The Covid effect–short, medium, and long term.
  • Increased costs for medical insurance, unemployment insurance, employee turnover, and more.