Final sale prices of small businesses for sale are influenced by a variety of factors, including revenues, business category, location, cash flow multiples and asking price. Though these factors are essential to keeping a pulse on small business sales, another often overlooked indicator speaks to fundamental market conditions. Days on market - or the length of time a business listing is on the market - is an underrated, helpful way to track the market and determine demand among buyers and expectations of sellers.
In fact, BizBuySell's recent Q2 Insight Report of small businesses sold from 2007 and 2016 reaffirms that business sale times can indicate larger economic changes. Additionally, days on market can effectively track the overall velocity of the small business-for-sale marketplace.
Days on Market Has Evolved Through the Years
Fresh out of the recession in 2012, the duration to sell a small business spiked upwards by 22 percent to 200 days, according to BizBuySell's days on market data. As the economy improved, time on market began to decrease as both buyers and sellers made moves more quickly. After 10 consecutive quarters of faster sales cycles, days on market finally increased in Q4 2014, following the rise of median asking prices. Last quarter, the median days on market was 188 days, up from a record low of 154 days in Q4 2014.
As economic growth accelerates, so does business buyers' personal finances and investment opportunities. In an environment with more relaxed lending policies, plenty of financing options and a stable stock market, more buyers have the capital needed to buy a business. Though the state of small business transactions looks promising, sellers still need to be realistic when it comes to the timeline for selling.
Setting Practical Expectations and Timeline
Small business owners often exhibit a great sense of urgency to close a deal once they've made the decision to sell. But as the BizBuySell data points out, the process of selling a business typically takes at least six months - a timeline that most owners don't anticipate. In fact, a separate BizBuySell survey on the selling process found that nearly half (44 percent) of owners believed the entire sales process would be finalized in less than five months. However, brokers generally don't agree with this timeline - 54 percent of brokers said sellers should set their expectations for days on market in the range of six to 11 months.
Though luck and good timing can lead to a faster closing, accelerating the purchase usually isn't possible. That's why it's critical for sellers to be prepared for a lengthy process before even putting their business on the market.
Here are some steps small business sellers can take to craft an appropriate timeline:
- Ensure the business is ready for prospective buyers: To facilitate a smooth selling process, sellers should ensure qualities like a descriptive listing and gather at least three years of detailed, verifiable financial statements to show credibility. These documents should include an income statement, cash flow statement, balance sheet and the seller's discretionary income. Don't forget about the curb appeal of your business. Prospective buyers often base their first impression of the business on its physical appearance. Even simple improvements like a fresh coat of paint, improved landscaping or new shelving purchases can dramatically improve a business' appearance and attract buyers who are looking to avoid tedious physical improvements
- If necessary, consult an experienced broker or M&A advisory firm: Seeking help from a broker or M&A advisor early on can potentially speed up the time to sell and take some pressure off sellers' shoulders. Identifying a broker or M&A firm generally takes one to two weeks.
- Establish desired sale price: Sellers can work with a professional appraiser or business broker to discuss the current market specific to their industry and set a realistic valuation for the business. Completing this valuation can take up to two to three weeks. Online valuation tools and various valuation methods can also help get a ballpark estimate of your business' worth.
- Prepare for listing: During these four to six weeks, sellers (or their advisors) should develop a list of prospective buyers and compile all business sale information including public listing content as well as confidential information to include in a selling memo for buyers who have signed a non-disclosure agreement.
- Focus on marketing efforts: The time to sell largely depends on the current market. For this reason, marketing can take anywhere from one month to a year or longer. Use this time to enhance and promote your listing.
- Be alert during negotiations: Depending on how many serious buyers there are, this stage could take up to four weeks. That's why sellers and their employees need to make themselves available to complete the sale.
- Carve 2-3 months into timeline for closing: Since no deal is official until paperwork has been filed and signed, sellers should avoid common issues with compliance and necessary financing.
Since these steps may differ from business to business, it's important to lay out a plan of action that aligns with your unique needs and desired outcome. Selling a business can be stressful and time consuming, but a solid strategy can ensure a successful sale process.