You started your venture 20 years ago "in your
garage", worked several 80 hour weeks, bootstrapped your growth, look on
your company with the satisfaction of an entrepreneur, and are now considering
your sale. The decision to sell is all
too often a knee-jerk one rather than a proactive one -- the principal reasons
are a severe health issue, owner burnout, the loss of life of a owner, general
industry decline or the defection of a major customer. Often times very
competent business people manage the sale of their business with less rigor
than in the sale of a home. Advance preparation can ensure that you leave your
business from a posture of power, not from weakness due to necessity. The
purpose of this article is to discuss the ten significant elements that a
business owner should take into account in their once in a lifetime opportunity
to maximize the rewards from their years of effort.
Do not wait too long.
Have you ever heard, "I sold my business too early?" Compare that with the number of times you've
noticed someone declare, "I should have sold my enterprise one years
ago." Unfortunately, waiting
excessively long is most likely the single prevalent factor in reducing the
financial results from the sale of a closely held business. The decline in business price normally is
most significant in that final year before exiting. The decision to sell is often times a
imprudent conclusion rather than a practical decision. An individual who spends 20 years running
their business and calculating their outcomes often behaves another way in the
exit from his firm. The primary reasons
for selling are events such as a significant health concern, owner frustration,
the passing away of a owner, general industry erosion, or the loss of a major
buyer. Exit your business from a posture
of strength, not from the necessity of decline.
Don't let that subsequent huge deal delay your sale. You can compensate yourself for that contract
you project to close with a astutely
crafted deal agreement containing contingent payments in the future if that
event takes place.
Prepare yourself for years after selling. We all create business plans both formally
and informally. We all prepare for
vacations. We plan our parties. We need to strategize for the most important
monetary event of our lives, the sale of our venture. Normally a privately held business represents
more than 80% of the business owner's net value. Launch with your plans of how you want to
enjoy the rewards of your work. Where do
you want to journey? What pursuits have
you been intending to start? What
volunteer work have you intended to do?
Where do you intend to have your home?
What job would you do if money were not an issue? You need to emotionally determine an identity
for yourself away from your company.
Prepare your business to establish the most value in a
sale. Now that you are all enthusiastic
about the fun things you'll do once you exit your business, it's now time to
focus on the things that you can do to maximize the worth of your business upon
sale. This topic is adequate subject
matter for an complete expose, however, we will concisely touch upon a couple
of significant factors. First, engage a
skilled CPA firm to do your financials.
Buyers fear risk. Audited or
reviewed financial statements from a well thought-of accounting firm reduces
the perception of risk. Do not assume
the buyer will give you credit for something that does not exist in your
financials. If you observe that a out
sized fraction of your sales comes from a
a small number of clients, launch a plan immediately to reduced customer
Buyers of companies fear that when the principal exits the
most important clients and vendors are at risk of leaving as well. Start to delegate management activities
without delay and pinpoint successors internally. If you have no one that fits that description
and you have adequate time, search for, hire and coach that person that would
stay on for the transition and beyond.
Buyers of companies desire to hold vital people that can continue the
progress of the company.
recognize the growth possibilities that are accessible to your business. What additional products could I introduce to
our existing client base? What different
markets could make use of our products?
What strategic alliances would help extend my business? Capture that in a document and identify the
resources required to pursue this plan.
Buyers will have their own plans, but you'll increase their perception
of the value of your business through your grasp of the growth opportunities.
Maintain your focus on running the business. A key error business owners make in selling
their business is to concentrate their time and concentration on selling the
business as opposed to controlling the business. This happens in large publicly traded
companies with sizable management teams as well as in private companies where
management is largely in the hands of a sole principal. Various large companies that are in the throes
of being acquired are guilty of losing focus on the day-to-day management. In case after case these businesses endure a
pronounced competitive dip. If the
acquisition does not occur, their business has suffered pronounced decline in
For a privately held business the effect is even more
acute. There simply is not sufficient
time for the principal to wear the many hats of operating his business while
embarking on a full-time job of selling his business. The owner wants the impending sale to be
absolutely confidential until the very final instant. If the owner attempts to put up for sale the
business himself, by default he has divulged that his business is for
sale. Rivals would like to have this
information. Bankers get nervous. Employees get nervous. Customers get nervous. Suppliers get
edgy. The owner has inadvertently
created risk, a potential slump in business and a corresponding drop in the
sale price of his business.
Be sure to get many potential buyers involved in your
business sale. The "typical"
business sale transaction for a privately held business starts with either an
unsolicited approach by a competitor or with a choice on the part of the owner
to exit. If a competitor initiates the
transaction, he generally isn't interested in over compensating for your business. In reality, just the opposite is correct. He
is trying to buy your business at a discount.
Outside of yourself there is no one in a better position to understand
the price of your business more than a main competitor. He will try to keep the sales process limited
to a negotiation of one.
In our mergers and
acquisitions practice the owner often contacts us after an unsolicited
offer. What we have realized is
generally that unsolicited buyer is not the eventual purchaser, or if he is,
the ultimate purchase price is, on average 20% higher than the first
offer. If the owner decides to exit and
initiates the process, it usually begins with a interaction with a trusted
advisor; accountant, lawyer, banker, or financial advisor. Let's say that the owner is contemplating
selling his business and he tells his banker.
The well- meaning banker says, "One of my other customers is also
in your industry. Why don't I provide you
an introduction?" If the
introduction results in a negotiation of one, it is suspect that you will get
the maximum and best the market has to offer.
Hire a Mergers and Acquisitions firm to sell my
business. You enhance your probability
of maximizing your financial results while dropping the risk of business
decline by hiring a firm that specializes in selling businesses. A large public company would not even
contemplate an M&A transaction without representation from a Merrill Lynch,
Goldman Sachs, Solomon Brothers or other high profile investment banking
firm. Why? With so much at stake, they realize they will
do better by paying the experts.
Companies in the $3 Million to $50 Million range fall below
their radar, but there are mid market M&A firms that can provide similar
services and process. Generally when you
sell your business, it is the lone time in your life that you go through that
occurrence. The purchaser of the last
company we represented for sale had up to that time purchased 25
companies. The sellers were high-quality
business people, knew their stuff, but this was their initial and probably last
business sale. Who had the advantage in this transaction? By engaging a practiced M&A firm they
helped balance the M&A experience scales.
Retain other specialists that have expertise in business
sale dealings. You may have a fantastic
outside accountant that has done your books for years. If he has not been involved in numerous
business sales transactions, you should think about engaging a CPA firm that
has the skill to direct you on significant tax and accounting matters that can
literally result in differences of hundreds of thousands of dollars. What are the tax implications of a stock
purchase versus an asset purchase? A
lower offer on a stock purchase may be far superior to a higher offer on an
asset purchase after the impact of taxes on your after-tax proceeds. Is the accountant that does your financials
competent to counsel you on that matter?
Would your accountant understand the best method to allocate the
acquisition cost on an asset sale between hard assets, good will, employment
agreements and non-compete agreements?
deal attorney is very distinctive from the attorney you retain for everyday
business law issues. Remember, each
element of deal makeup that is beneficial to the seller for tax or risk purposes
is normally correspondingly unfavorable to the buyer, and vice versa. Therefore the skilled team for the buyer is
under directions to make an offer with the most advantageous tax and reps and
warranties results for their client. You
need a professional team that can equal the buyer's team's level of experience
with deal structure, legal, and tax issues.
Be realistic in your demands on sales price and
provisions. The days of irrational
exuberance are over. Strategic buyers,
private equity groups, corporate buyers, and other buyers are either very smart
or do not endure very long as buyers. I
dislike rules of thumb, but usually there is a limit of sales prices for
similar businesses with similar growth profiles and similar financial
performance. That being said,
nonetheless, there is still a range of selling prices. So, for illustration, let's say that the
sales price for a business in the XYZ line of business is a multiple of between
4 and 5.5 times EBITDA.
Your goal and the goal of a high-quality M&A advisor is
to sell your business at the top end of the range under beneficial
provisions. In order for you to sell
your business beyond that range you must have a very significant competitive
lead, set of intellectual assets, extraordinary expansion opportunities, or
substantial barriers to entry that would rationalize a premium purchase
price. If you think about the process of
detailing your car prior to offering it
for sale, a good M&A advisor will help you in that course of action for
your business. Let's say, for example,
that 4 to 5.5 multiple from above was the multiple in your business and you had
an EBITDA for the last fiscal year of $2.5 million. Your gross sale proceeds possibly could range from $10 million to $13.75 million.
A skilled M&A firm with a successful practice can step you to the
pinnacle of your industry's range. The
impact of reaching the peak of the sales price range vs. the low-end more than
justifies the success fee you pay to your M&A professionals.
In the business selling process, reveal, reveal, reveal, and
do it early. A seemingly insignificant
less important negative exposed near the beginning in the process is an
inconvenience, a obstacle, or a aspect to negotiate about. That same negative discovered during negotiations,
or worse yet, during due diligence, turns into, at best, a vehicle for
reexamining the validity of every slice of data to, at worse, a deal
breaker. No agreement in the world can
cover every possibility if there is not a primary meeting of the minds and a
trust between the two parties. Unless
you are fortunate enough to get an all cash offer without any reps and
warranties, you are going to be united with your buyer for some period in the
future. Buyers strive to keep you on the
hook with reps and warranties that continue for a few years, employment
contracts, or non-competes that last, escrow funds, seller notes, etc. These all fulfill a dual role to reduce the
risk of future negative events. If
future significant negative events transpire, buyers tend to be punitive in
their outcome with the seller. Volunteer
to divulge your company's warts near the beginning in the process. That will foster belief and credibility and
will ensure you get to keep all of the monies from your sale.
Be flexible and amenable to inventive deal structure. Everything is a negotiation. You may possibly have in mind that you desire
a total purchase price of $13 million and all cash at close. Maybe the market does not endorse both
desires. You may be able to get
innovative in order to arrive at that purchase price goal by agreeing to carry
a seller note. If the sale procedure
creates many bids and the finest one is $11.3 million cash at close. You may counter with a 7-year seller balloon
note at 8% for $3 million with $10 million cash at close. If the buyer is a stable company, that may be
a enhanced outcome than your previous goal because the best interest proceeds
you can currently obtain on your investments is 4%. Be flexible, be inventive, and use your advisors
to negotiate the demanding parts and preserve your connection with the buyer.
You may possibly have spent your life's labor building your
business to supply you the returns, wealth creation, and heritage that you had
planned and hoped for. You organized and
were aggressive and determined in your pursuit.
You have one concluding act in your business. Make that your closing business success. Leave on purpose and do it from a position of
power and receive the highest and best deal the market has to offer.
is a Merger and Acquisition Advisor and President of MidMarket Capital
, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist
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