Selling a Business: 7 Considerations
Selling a business takes planning, patience, time and talent. If you’re thinking about selling yours, print this post out and keep it on your desk or tape it to your mirror so you see it everyday.
Most people think that selling a business means handing over the keys and walking off into the proverbial sunset. While that may be true in many cases, it is only one definition – one option of several.
Selling a business can mean different things to different owners depending on the business’s condition or the owner’s objective. It can include the addition of partners buying into and bringing new skills to the business. It can include raising capital by selling an equity stake; bringing investors into the business. It can also mean an outright sale and exit from the business.
However, whichever path the owners choose, if the process is not properly planned, managed and guided by the right talent, it can lead to some really crummy outcomes, acrimonious disputes and a loss of precious time and money.
Selling a business, while often complex, doesn’t have to be chaotic. But know going into the project that selling a business takes many months and sometimes years. That said, if you keep a few things in mind, establish a plan and follow that plan, the process will be less painful – and more likely to be successful.
1) Type of Buyer
As a rule, buyers fall into three categories. Financial BuyersFinancial buyers make up the largest portion of the buyer pool in the Main Street and Lower Middle markets. Financial buyers are looking for something to do that will generate a handsome cash flow. In many cases, they are corporate refugees that want to get out on their own; to control their own destiny. This could be a solo entrepreneur or two or three friends or co-workers.
Strategic BuyersStrategic buyers are oftentimes larger companies that are seeking a competitive advantage by buying a smaller competitor to extend their customer base or a way to broaden their product or service offering by acquiring a business that offers a product or service that complements the acquiring company’s products or services.
EmployeesAn employee buyout – in whole or in part – offers loyal employees an opportunity to participate in the business’s future growth, a fact that will have the ancillary benefit of motivating them to preform at their highest level.
2) The Valuation
While not always the most important aspect of the transaction, the value of a business is usually what is the most contentious.
The seller must know what the market suggests that the value is and then market the business at something close to that value. Bringing a business to market at a price significantly higher than its value will result in months – or even years – of wasted time and effort.
Among other factors, a valuation should take into consideration the industry the business is in, any special licenses it has, all physical and intellectual properties that are assets of the business, the business’s cash-generating ability, the goodwill of the business and any other tangible or intangible assets that add value to the business. The valuation should be as detailed as possible as it is a key element of the negotiations.
Our valuations generally range from 20 to 30 pages in length and are almost never challenged by a buyer. (The same can’t be said about the seller, though!)
There are various professionals that can value businesses including accredited business appraisers and professional business brokers, especially those with the Certified Business Intermediary certification. Make sure that whoever is hired to value the business is available to defend the value they arrive at.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
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3) Transaction Experience
The sales process is an intricate one. One of the choices facing business owners initially is whether they’ll handle the transaction internally or hire professional advisors. A business owner trying to sell his or her own business is comparable in its wisdom to an internist trying to replace his own liver. And remember the old adage that a lawyer that represents himself has a fool for a client.
Selling a business is time consuming and if the owner tries to do it himself, he is sure to damage its value simply because whatever time spent trying to sell it will be taken away from the time needed to run it. Not to mention the fact that the seller generally has no idea what he’s doing.
Transaction advisors – from tax professionals and transaction attorneys to financial planners and professional business brokers – will add some modest costs to the process but they are critical if the seller is to realize the highest value for the business. And they can help the seller avoid countless stumbling blocks along the way.
Experience has its own value. An experienced business broker can bring qualified buyers to the deal simply by scouring his or her database. Make this project as easy and success-oriented as possible. Line up the necessary professionals and let them do the heavy lifting.
4) Identify What You Want in a Buyer
Before the process begins and with the help of a team of talent, list a number of specific attributes you think the ideal buyer must have. Such a list might include factors like any necessary technical expertise, financial capacity, future planning and, in the case of a partial sale or “earn out“, compatibility with the seller and key employees. Such a list will be critical in evaluating the buyers and such evaluation is important from the standpoint that, in most case, all buyers are not good buyers. How so? Well, somewhere north of 80% of all business transfers involve some component of seller financing. If the seller is dependent on the buyer making payments for the purchase, the seller has a vested interest in the continuing success of the business. Beyond that interest is the seller’s legacy. Many sellers have spent years building their business and see it as how they’ll be remembered. The question to ask late at night is, will the buyer preserve that legacy?5) Prepare for the Due Diligence Process
A major aspect of the sale and purchase of a business is the buyer’s due diligence. A buyer is going to want to dig deeply into all aspects of the business to make sure he or she is getting what they think they’re getting. This process can seem intrusive but the seller should ask themselves what they would want to see if they were buying the business.
If not prepared for, due diligence can be time consuming, particularly if the data has to be gathered when the potential buyer asks for it. Therefore, before you start the selling process, meet with a professional business broker to ensure that all the information a buyer would need is readily available.
The information that’s normally required includes – but is not limited to – at least three years of financial records (including profit and loss statements and tax returns), proof of ownership and authority to sell, business licenses, permits, financial obligations like loan documentation, lease contracts, bank statements, the valuation of the business, outstanding contracts, work in progress, etc.
We advise using a secure virtual data room for all this because access to this data can be both controlled and made available to any legitimate buyer regardless of location.
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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
Become a Professional Business Broker…
6) Tax Consequences
In most countries and jurisdictions, the sale and acquisition of a business has tax consequences – sometimes significant ones. If a seller isn’t familiar with them – or been advised by someone who is – both the short and long term financial results could be wildly different from what the seller was expecting Such consequences will vary depending on how the transaction is set up. This is where an experienced transaction attorney and good tax advisor will pay for themselves many times over.7) The Actual Transition
Most smart buyers will want the seller to stay on for some period of time. The complexity of the business will impact this as will the seller’s day-t0-day involvement as the “face of the company” in the several years leading up to the sale. We’ve been involved in transactions that required the seller to stay on for as little as 30 days and as long as three years. The value of the seller’s time is part of the purchase price the parties negotiate. The seller can be paid as an employee or an independent contractor. This aspect can also be part of an “earn out“, a concept that the price paid for the business is dependent on its performance over a certain amount of time.The Bottom Line
Selling a business has an enormous impact on the sellers and, if not handled properly, can result in years of regret. The issues mentioned in this post are just some of what must be considered by a business owner. And to do this correctly and to assure the best result, planning – and plenty of time – is required.
A seller should keep these points in mind when starting to think about transitioning out of their business. And a business broker, when first meeting with a potential selling client, should tick off these points to give the seller a sense of the scope of a proper sale.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want 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 profitable week!
Joe
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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 600 in the world. He can be reached at jo*@Wo*******************.com