9 September 2024: Selling a Business: 5 Aspects to Plan
Planning. Selling a business takes planning.
“Planning” for the sale of your business can be a complicated endeavor and involves considering not only multiple facets of the business but also of the sale itself.
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For example, preparing the business for a sale is separate from preparing the owner for that sale. And both are different from preparing for the myriad ways various buyers are likely to structure their offer.
Though it’s not possible to cover all this ground of this topic in one post, here are five aspects of the process any business owner should understand prior to bringing their business to market
Strategic or Financial Buyer?
We’ve often discussed the two general categories of buyers: strategic and financial. Do you know which is the most likely to be interested in your business?
Strategic buyers have different goals than do financial buyers. Because their goals are different, the way those buyers will value a business vary. It’s important to understand which type of buyer is the more likely to be interested in your business and why. But it’s also important to understand what the different buyer types will be looking for and how they generally approach deal structure when considering a potential acquisition.
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But understanding all that isn’t all. You must also consider how a buyer’s goals comport with your own goals when selling a business.
What will the buyers likely expect from you? How are they likely to want to structure the deal? Will they expect you to hang with the team for the next five years or are they more likely to expect you to clean out your locker and head for the exits? Different types of buyers have different expectations of the seller. If these expectations don’t mesh with your goals, there’s little reason to think such buyers will change their goals or that you’ll be happy meeting theirs
Earn Outs
As most of you who’ve been following this blog know, earn-outs are a way to close a gap between what the buyer and seller believe the business is worth. But it’s also a way keep a seller onboard and focused on the continued growth of the company.
Earn-outs are also used when the business is sold, in whole or in part, to a private equity firm (more on private equity in a moment.) Such buyers usually want the management team, including the seller, to stay on for the duration of the PE firm’s ownership.
PEGs – groups of investors who combine their capital in a firm managed by so-called “professional investment managers” – have to invest their capital to provide their investors with presumably handsome returns. They do this by acquiring all or most of various businesses that they feel will, with the right management team, experience strong near-term growth. Their ultimate goal is to sell the acquired business in three to seven years and return their investors’ initial capital with that aforesaid “handsome” return.
An earn-out is such instances can be a very lucrative option for a seller as it essentially allows the seller to “sell their business twice“.
Private Equity Firms
Private equity is extremely active on our market and almost any business with a high six- or low seven-figure EBITDA (earnings before interest, taxes, depreciation and amortization) is a potential target of such buyers. We’ve seen this earnings standard come down over the past three years, suggesting that PEGs have a great deal of capital that is looking for fewer and fewer ultra-high quality growth businesses.
But PEGs have different goals than other buyers, either strategic or financial
And whether a PEG should even be considered as a potential buyer could be quickly determined by answering one question: If you just want to retire and move move on to playing golf or racing yachts with The Big Dog, private equity is not your buyer. You might be better off considering a strategic buyer that intends to fold your business into their existing operations and send you on your merry way.
However, if you’ve still got fire in your belly and you’re passionate for business, then a private equity buyer could easily be the preferred route because you can stay involved, grow the business together and, if your continued involvement is as an equity partner – albeit a minority one – you have the chance to sell the business a second time.
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Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on the cost of any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
Deal Structure/Terms
What is the best way to structure the transaction? There are so many variables on the part of both buyer and seller that there is no pat answer to that question.
Should it be a “stock” (or “equity”) sale or should it be an asset sale? This decision alone impacts each party differently. The seller needs to know why he or she should choose one and why a buyer is likely to choose the other. Understanding the buyer’s motivation and concerns in this issue will make finding common ground more likely.
But that only one of dozens of deal terms that a seller is likely to encounter and few sellers have considered most of them. In fact, many sellers aren’t even aware of them.
For example: How is obsolete inventory to be handled? What representations and warranties will the buyer require of the seller? How are “change of ownership” clauses in contracts – especially financial instruments – to be addressed? How will payables and receivables be distributed? Will the seller be expected to assist in the financing?
These issues and more must be anticipated and planned for by the seller before the business is offered on the market.
Price vs Value
Many business owners have a number in mind that they want to sell their business for. As the bearers of bad news, we’re often required to tell sellers that their number is “completely irrelevant.”
No one – no buyers, appraiser, lender or anybody else – is going to base their valuation on what the seller wants. You must be objective. If you think that your business is worth far less than your dream, don’t even waste any time talking to anybody about selling it. In your marketing efforts, you will surely prepare a brief description of the business’ financial performance. If the price is set at 34 times the earning because that’s what Microsoft is selling for, your business will never sell.
When setting a price, you must be aware of several things: 1) Yours is not the first $7 million software (trucking, plastics, HVAC, real estate, healthcare, small manufacturer, etc.) business that has ever sold. Similar businesses are selling all the time and even moderately savvy buyers will know what your businesses earnings are worth; 2) There are thousands of businesses for sale at any given time. All are your competition.
The Bottom Line
If you have a qualified business broker or M&A specialist, they will guide you through this process. They’ll prepare an abstract of the business’ performance that will disclose the earnings number and justify the price expected based on market research.
They’ll also be able to advise you on many of the aspects of selling a business, including the ones mentioned here. But brokers are not the sole players on the seller’s team.
While a business owner should be giving thought to all the issues mentioned above before they seriously consider bringing their business to market, equally important is the team that’s assembled to help. The right team will help with the planning as well as the implementation.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
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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.
Joe
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The author is the founder, in 2001, 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 600 in the world. He can be reached at
jo*@Wo*******************.com