According to the Business Reference Guide, 80 percent of businesses put on the market do not sell (firms under $50 million in revenue). According to PricewaterhouseCoopers, 12 months after selling, 75 percent of business owners surveyed “profoundly regretted” their decision to sell.
Maybe selling a company is more complicated than people think?
I can’t blame business owners for believing it will be easy to sell. Owners receive “offers” every week. But, these offers aren’t genuine. They’re trying to pique your interest so that they can inspect you. Then they’ll point out all the problems that you don’t think are problems, and then (if at all) give you their real (and dramatically reduced) offer.
Selling your business is the biggest financial event of your life. You want to do it right — from beginning to end. It’s not like trying to sell a house, where you can step out of the deal with no consequences. You could lose customers, management may join a competitor and it will be hard to attract new employees.
I wrote the forward to John Warrillow’s book, “The Art of Selling Your Business: Winning Strategies & Secret Hacks for Exiting on the Top.” The book lays out a formula for attracting multiple acquirers, then negotiating your terms and highest after-tax selling price.
It’s a task to sum up a 195-page book in 1,000 words (email me at AHarris@BerkshireMM.com if you’d like a copy.) I’ll have to skip important details and use different language that, I hope, will allow for effective brevity.
Prepare to sell your business
I covered this in depth in my own book, “Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire.” John’s book covers everything that happens after my book.
You did the work to maximize cash flow and make yours a transferable business. You’ve verified with a certified financial planner what after-tax proceeds you’ll need to fund your next act — whether it’s retirement, starting a new business, or whatever other plans you have. The next step is to determine how much someone will pay you.
Most business owners have never received a professional valuation. Whatever you think your company is worth, you’re wrong. You’re not objective. Potential acquirers will scrutinize the flaws and oversights you’ve became blind to or have neglected.
The instinct of some is to have their certified public accountant conduct the analysis. Traditional accounting systems provide feedback on tangible assets, such as equipment valuation and proforma profit and loss statements (P&Ls). However, intangible assets are the direct drivers of business attractiveness.
Many businesses sell in a range of four to five times EBITDA — earnings before interest, taxes, depreciation and amortization). According to the Exit Planning Institute, the intangible assets will account for about three turns on a four to five multiple. Intangible assets include human, customer, structural and social capital (aka, the 4C’s).
Prepare to market your business to buyers
A qualified business broker will use the findings of your valuation to start your Confidential Information Memorandum (CIM) to present to potential buyers. The CIM won’t provide all the details, but you will need to gather those.
If a potential buyer proceeds beyond the CIM, you’ll maintain deal momentum by completing the due diligence package. The package includes audited financial statements, the valuation, equipment lists, leaseholder information, human resources and legal reports, ad information on production, marketing and sales.
Buyers will require this information. You don’t want to appear unprepared by having to spend days, or weeks, gathering data. Also, many owners want to keep the sale confidential to their employees. Hurriedly gathering information will send up red flags. A due diligence package shows the buyer that you are a serious and sophisticated seller. It creates the illusion of buyer competition, even if there is none, thus helping negotiate price and terms.
Confidentially pitch your business
The CIM is like a pitch book, but it’s not. The CIM isn’t provided to everyone. The business broker will build a shortlist of the entities that would be your natural acquirer. That could be a larger competitor, a strategic acquirer, a financial buyer, or a private equity group. The potential buyer doesn’t get access to the full pitch book until they are financially qualified and signs a nondisclosure agreement (NDA).
You have no real leveraging power with merely one offer. A good broker will create competition for your business and keep them interested. The broker will provide a buffer so that you don’t seem desperate and can be your “bad cop” in trying to negotiate terms that might otherwise push your buyer away if not done tactfully.
But, not all nudging is rough, nor should it be. There can be the sales pitch (how your company can provide access to a new market, your client list, a new product in the pipeline, economies of scale), or the assurances.
Buyers value an acquisition target based on the predictability of its cash flow. The buyer will feel assured if there are contracts with key clients and top management to stay post-acquisition. Not only will they be more willing to move forward, but you’ll be more valuable to them.
Fielding offers and negotiating
An offer has two primary components — the price and the terms of how and when you’ll receive payment.
Do the advantages of a stock sale or an asset sale benefit you the most? What are the disadvantages? How much of the payments are guaranteed, and how much is structured as higher-taxed earn-out? Could the payout drop beyond the sticker price because of some convoluted earn-out scheme? What contingencies must be met to receive payments? Is it bank- or seller-financed?
The deal structure has to strike a balance between maximizing your after-tax price, getting paid at the pace you want (many deals are not all cash up front) and your post-sale role.
Deal-closing and transition assistance
Let’s cut to the chase — don’t get ripped off. Structured payments are usually tied to the acquired firm reaching profit goals. But, when you sell the company, how do you manage the possible manipulation of P&L’s?
The business transition is like passing the baton from one sprinter to the next. When done correctly, it’s smooth; uninterrupted. Even though sprinters have practiced the handoff hundreds of times, sometimes the baton is dropped. If a business owner wants to get into the race and pass the baton, there’s more to it than handing over the keys.