Most business owners assume selling a business is like selling a house. This assumption can lead to mistake when selling a business because selling real estate is easy when compared to selling a business, and here’s why…
#1 There is a widely-recognized infrastructure supporting the sale of real estate. Selling a business is more of wild-west experience. Every state has extensive laws and regulations that cover the sale of real estate. Every town, city and village has real estate brokerage firms with lots of experienced full time agents. Most colleges have real estate degrees. There are entire law firms that focus on the sale of real estate. The paperwork to buy and sell real estate is basically all standard forms. Contrast that with the sale of a business. Only a few states have any regulation or prescribed rules for calling yourself a business broker. The documents for the sale of a business are generally quite cumbersome and have to be created from scratch for every transaction. The due diligence process when buying a business is long, expensive and often contentious. No rules, no process ….hence the Wild West comparison.
#2 Real estate valuation is a science. Business valuation is part art, part science.
You can get an advanced college degree in real estate appraisal. The state regulations to hold a real estate appraisers license are quite demanding, and appraisers are required to have ongoing continuing education. There isn’t a real estate transfer in your neighborhood, town or state that isn’t precisely record and immediately available for all the see online. Simply said, there are no secrets when it comes to real estate valuation. On the other hand, ask how to value a business and you’ll get four or five opinions. There is no national, much less local, repository of information about business transactions because there is no recording mechanism to track of business transfer data. Hence, the negotiation process to settle on a business valuation is never easy or straightforward.
#3 Due diligence during a real estate sale generally doesn’t turn up problems. Due diligence during a business sale almost always turn up problems. I have seen very few real estate deals come unwound because of something found during due diligence. However, it is rare for due diligence during a business transaction to not turn up problems, some of which will cause the deal to be re-negotiated and some will cause the deal to come completely unglued. Every time I have a client sign a letter of intent, which formally starts the due diligence process, I tell them “now is when the hard work really starts.”
All three of these factors point to the same conclusion, when considering or going through the process to sell a business, an owner will need the help of an experienced, thoughtful, and mature advisor. You don’t sell a business by putting a sign in the front yard and waiting for a buyer to show up.
Tennessee Valley Group
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