First and foremost, the best time to sell a business (a company) is when the owner (or owners) are emotionally ready and the business is valued high enough for the owner to reach his/her financial goals.
Even so, company founders who think they’re ready to sell rarely are. Investment bankers and M&A firms generally agree that the owners they meet with want to sell, but that only 2 to 3 percent are really ready. The rest are open to emotional, raw negotiations and bargain price predators. It is also generally known that about 20% are “almost ready”, meaning that if they had just done a few key things they would have received a lot more for their businesses.
Although there is a fine art in selling your business (and of course some showmanship can help), there is certainly a wise and scientific way to go about making sure you get top dollar for your business. Most people don’t put their house on the market without cleaning it and repairing things. But, most business owners neglect to do just that. They sell their businesses without repairing anything or even cleaning up the place. Do you know why people pay below market for homes that are foreclosed on? Or homes with repair issues? Of course you do.
Now, you probably have had a lot of success by making things happen, learning from mistakes, and pressing on. Hard work is your secret. You probably also don’t understand why people just can’t get things done, instead of sitting around talking about doing things. You have made things happen by taking action and working hard. You have always had a long task list and you have worked hard to check off the tasks. Your knowledge and ability to take action have pushed you forward.
When selling a business, you need to change that thinking a bit. Selling a business is not about working hard or fast. And, it’s not about just moving the needle forward and making things happen. The process requires planning, thoroughness, strategy, patience, and utilizing wisdom, the wisdom that you have gained over the years.
Proverbs 11:14 says, “Where there is no guidance, people fall, but in an abundance of counselors there is safety.”
Benjamin Franklin has been quoted as once saying, “He that will not be counseled cannot be helped.”
Selling a business is often times a new gear for business owners. And, it is absolutely critical that they exercise patience, attention to detail, delegation, and long-term strategic planning. For many it is unnatural. If that is the case, often times it is better to surround yourself with an “exit team” to navigate you through the process. Seek counsel and advice. Don’t reinvent the wheel. Talk to those that have already built one.
“Give me six hours to cut down a tree and I will spend the first four sharpening the ax”. – Abraham Lincoln. Companies that want to sell need to contemplate a statement like this and reflect on its meaning.
The Exit Plan
- Increase your profits.
In general, potential buyers are using the profits of the company as a foundation. And, valuing it at an amount equal to or as multiple of earnings before certain expenses, which are really just non-recurring or “soft” expenses, like depreciation expense. This multiple of earnings is directly related to the risk that the buyer sees in your business and its potential to generate future profits (risk=uncertainty). To increase the multiple that you get for your business you’ll need to be diversified with both products and customers. You need to hold costs down, and you need to be able to show that there are systems in place in order to do this on a daily basis.
- Install great people.
The most important factors to potential buyers are the strength of the management team around you and how involved you are in the business. This should be very intuitive, but often times the owner or owners of the business have created a business so dependent on them that the business isn’t really worth anything. Act accordingly, and as the owner/seller, you want to start removing yourself from daily operations and turn your attention towards growing the business and boosting profits. Hiring, training, and retaining great people is extremely valuable to a buyer, and most sellers overlook this value.
- Pay for audits.
Potential buyers can be very wary or mistrustful of financial statements that have not been audited by an outside CPA firm. I’ve seen people trying to sell their business with bank accounts that don’t reconcile and balance sheets that don’t balance. This is not uncommon. On the other end of the spectrum, if you’re thinking about selling, ideally you should have at least three years of audited financials prior to the sale. This is not for the faint of heart as this can be an expensive task. However, if you get $2 million for your business instead of $1.2 million, you will see how this can handsomely pay off.
- Document your processes to the absolute best of your ability.
You have to think like a franchisor selling franchises to complete strangers. In order to do that, you will need to list every detail and process involved in your business. This will allow potential to almost anybody to operate it. And, for the strategic buyer (which can often times be the best type of buyer), this makes integration much easier and less costly. Good processes and the accompanying documentation makes a company much, much more valuable. All of this results in the perception of risk from the buyer side to be greatly diminished.
- Get realistic and set proper expectations.
The number one reason, by far, that most deals fail is that the owner cannot let go of their unrealistic expectations of the company’s value. Or, they know what the company could be worth, but have not done the hard work to make it worth that now. They have not paid attention to numbers 1-4 listed above. I am accredited through the AICPA to perform very formal business valuations that can often times be used in a court of law to determine equitable value. And, I can tell you that when a company is not paying attention to what I have written about above, I have to significantly discount the value of the company. Do not allow your business value to be discounted for all these risks. The difference could be between retiring and not retiring.
- Intimately understand the tax effects of the sale transaction.
As a CPA and a tax savings “enthusiast”, I have clients coming to me to consult with them on tax matters. For whatever reason, many people sell their businesses (1) when they are not ready and (2) they do not pay attention to the tax effects (or they have an unqualified professional advising them). A lot of times, I first point out some simple things they could have done, or the attorneys could have done, to mitigate their tax bill (can we go back and re-do this contract?!). But, often times it is too late. This process needs to be done as part of orchestrating the entire process of selling the business. Selling a business is a process with a lot of moving pieces and parts. It is easy to make a critical error.
Sometimes, the owner has plans on retiring only to later learn that because of the tax bill they cannot retire. What a huge mistake this is! You spend your entire life growing this business only to save a few bucks in the process of selling it, and now you have lost hundreds of thousands or potentially millions of dollars. Please do not be penny wise and pound foolish selling your business. It is a systematic process that involves proactive planning and great thoroughness. You remember the story about the big bad wolf and the three pigs? Do not be one of the majority of business owners who build a straw house. Take the time to build a brick house exit plan and get the value you deserve.
- Understand your market.
Just as you would go through the process of determining the market for your products and/or services, the same holds true for selling a business. The best option here is to hire someone that can help you navigate this process. If not, you really need to understand the different types of buyers and their motivations behind a purchase. Ideally, you want to sell to a buyer that needs the value in your business to create value in something else they already have going on. This is called a strategic buyer. This buyer is not buying your business for an income, they are buying it for a 1+1=4 scenario (often times referred to as synergy). Therefore, they will pay more for your business. Not all businesses can be sold to a strategic buyer, and the full process of targeting a market for your business is beyond the scope of this article.
Credo advises many business owners through this type of process through its CFO services and a very close strategic alliance with Apex Exit Advisors. Check out our sites for more information or call us anytime.