Wednesday, January 29, 2014

Sell Your Business from a Position of Strength

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 concentration.

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.

 Investigate and 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 value. 

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?  

 A 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.

Dave Kauppi 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