Business Brokers as Advisors
18 April 2022: Business Brokers as Advisors
Business brokers play many roles when working with business owners, both before the listing meeting as well as during the sale process.
Our role can change over time as our client goes from being a business owner – whose goal is to grow their business – to a business seller, whose goal is to get the highest value for that business.
But not all relationships with business owners are the same. Some owners become clients years before they’re ready to sell. We offer advice on growing their business as well as periodic valuations so that they can see where they are on their personal journey. Other owners call us after a bad day.
As you can imagine, we have a different relationship with the “bad day” owners.
There are several reasons an owner would contact us long before they are ready to sell. One of them is to plan for the eventual sale.
Now, not all business owners plan for the sale of their business. This is particularly true with the owners of small businesses. But as the size of the businesses we work with increases, we tend to be dealing with owners who are more sophisticated and forward-thinking. They are more inclined to have thought about what the ultimate plan of their ownership is and to see themselves as one day entering a new phase of life, beyond the scope of their business.
Because most such owners realize that they will sell their business some day, their planning – and our advice – includes determining how best to grow their business so they can realize the highest value when that day eventually comes. But another aspect of the planning includes estimating what they’ll NEED.
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Selling a business is not the end of life. Business owners have got to start thinking, long before the business comes to market, about what comes next because the answer to that question will determine how and when the business should be sold, how the sale should be structured and consideration of the two main issues that impact the amount of money a seller walks away from closing with: taxes and the financial structure of the sale.
What’s Going Out?
Last week’s post – the final installment of our six-part series on selling a business that’s not for sale – discusses the aftermath of a sale from the seller’s perspective if they’ve failed to ask themselves the question, “what comes next?”
Some business owners want to tell us early on what they “need to get” from the sale of their business. But what they “need to get” and what the business is worth are, in most cases, two very different numbers. We often ask owners how they arrived at the number they say they need. We’ve gotten some reasonable answers that indicate that some serious thought was given to the “what comes next” question. Others, however, appear to simply like round numbers. (One, two, three and five million seem to be the most popular.) But to assure that life in the aftermath of a sale is not fraught with confusion and regret, several and often-neglected questions must be answered. Here are some of the most important.
What does the seller plan to do post-closing? If they plan to retire, have they described their retirement?
Retirement means different things to different people. If they plan to downsize, move to a warm climate and plan golf everyday, a certain amount of money is required. If they plan to race sailboats around the world or compete with Elon in a new space race, a completely different bank account will be necessary.
Has the seller run the numbers? Do they know what they’ll need to fund whatever they plan to do?
Start Another Business
If the owners fancy themselves as “serial entrepreneurs” and plan to launch a new business, have they determined what they’ll need to launch that business? Will the proceeds of the sale of their existing business be enough – and be received in time – to fund that new enterprise and support themselves and their family during the process?
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Do the owners plan to continue to enjoy the same lifestyle that the business made possible? If so, the sale proceeds – along with any other investments the seller’s have – must be able to generate roughly the same amount of income post-closing as the business did for the owners when they owned it.
If the business has been generating $650,000 in discretionary earnings in recent years and the owners were enjoying a $650,000 annual lifestyle, marital harmony might be seriously disrupted if the after-sale proceeds are capable of generating only $300,000.
Business brokers must be able to show the sellers that, if the business was paying for their Lambos, their health insurance, their Caribbean vacations (because annual conferences were held in Barbados) and the family’s weekly case of Dom, either the post-closing numbers have to continue to support these expenditures or they owners will have to start forgoing extra cheese on their Whoppers.
And with gas prices hitting new highs every Tuesday, if you suddenly have to come out of pocket to keep the Lexus on the road, post-closing life might not be exactly what the seller imagined.
What’s Coming In?
Once the above questions are addressed, the next exercise is to do some basic calculations to try to estimate the seller’s net proceeds at sale – and net proceeds will be impacted by two main issues: taxes and deal structure.
Sellers must have some idea what their tax liability is likely to be when the sale happens because the tax man is going to want to take a good-sized chunk of the value of what the seller’s hard work has generated. So the sale of a $5 million business will not generate $5 million for the seller – even though that’s the number the seller will have in mind if we present them with a valuation of anywhere near that figure.
The first consideration, of course, is the tax impact. How much of that $5 million will the government feel it has a greater right to? The seller can’t start planning his post-closing life on the assumption that he’ll have $5 million when, after the brilliant financial talent in Washington, London, Madrid, Cairo, etc. yanks theirs off the top, only $3.75 million remains.
Here, we mean primarily the financing structure of the deal.
Remember, something north of 80% of business transfers involve some degree of seller financing. How that financing is structured will determine several things, among which are: 1) how much the seller walks away from closing with; 2) what the seller’s future cash flow from the sale will look like, and; 3) what the tax liability will be over the time period between closing and when the seller receives the last of the funds owed.
We aren’t accountants or financial planners – facts that we suggest you repeat constantly and loudly to your client – and we play a limited role in all this planning and calculation. But we are responsible for making sure our clients know about these issues, how they can impact the amount of money available to them in their post-closing life and, most importantly, that they know they need to consult with someone that can help them in this aspect of the planning.
The Bottom Line
Our relationship with a seller can begin long before a sale is contemplated – or immediately after the business owner comes home on a Tuesday and decides he’s had enough – of cheapskate clients, rapacious vendors, thieving employees, overbearing inspectors, obnoxious bureaucrats or even the leaky roof in the reception room – and says, “I’m outta here!”
But whenever we get the call, we know that the topics discussed in this post must be brought up early in our conversation. We want to make sure that the seller enters the selling process with realistic expectations. If you’re a business broker – or a real estate agent that wants to sell businesses – you need to do the same.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
This week one of the inquiries we received was from a U.S.-based roll-up company looking to acquire direct-to-consumer eCommerce brands that sell products on Shopify. No minimum size required
If any of you know of something that might fit, please let me know.
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The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com