Selling a Business: 5 Ways to Get the Deal Done
Did the Window Just Open?For every seller there is likely to be a window of opportunity. Not planning in advance – a common situation with many business owners, unfortunately – can cause many owners to miss a slam-dunk opportunity. In the current active M&A environment, buyers are in the filed hunting for decent businesses to buy. As I’ve written repeatedly, private equity groups (PEGs), family offices, high newt-worth individuals and companies looking to expand via acquisition have been knocking on our doors for the past few years. Keeping updated records, a detailed business history and sales portfolio on hand at all times will pay off. You just never know when that perfect buyer may walk into your business and make you an offer you just can’t refuse. This happened to me in the mid-1990s. My business wasn’t for sale and, as a result, I was unprepared when a buyer suddenly materialized. Though the transition went off without too much aggravation, I suspect that, had I known then what I know now, I might have reaped a higher valuation and the process might have gone more smoothly.
Who’s Up Next?Think about succession. I’m not thinking about the next generation when I refer here to succession but rather to the more general, “who will succeed you as owner”. A business owner must put the business in a position so that a potential buyer can see that the owner has been planning and considering the transition for some time. If that’s apparent, the buyer will feel far more comfortable that the seller has set them up for success. This will generally result in a higher valuation and sale price. You want the buyer to see there was a strategy developed for the sale and that it’s not a quick “I’ve had enough” exit.
Be Mindful of the TimeWhen selling a business, everybody needs to understand the time required. Some Main Street businesses are sold in a seven to 12-month time frame but others – and many lower Middle Market businesses – can take several years to find the right buyer. Given that, it makes sense to say that long-term planning is key to any successful business sale. Crossing the goal line can be a long and arduous process, meaning the owner and senior team can become dangerously distracted which could result in some real damage to the business. Business owners should resolve to either keep running the business or to lead on the transaction – but not both. This is where the proper team comes into play. The owner and senior team are usually quite qualified to run the business profitably – but uniquely unqualified to handle the minutia of the business transition. A professional business broker or M&A advisor is crucial.
Price is Not the Only IssueKeep Price in Perspective: A business owner may want “X” for the business but a business’ value to either party is influenced by various factors, motivation being one.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to market and sell businesses.
Become a Professional Business Broker…The level of motivation on the part of the seller is generally – but not always – more important than that of the buyer to determining the ultimate price of the transaction. Terms such as financing, earn-outs, management team in place and whether the seller will stay on to run the business all impact price, so some flexibility on the art of the seller must be considered. Equally important is that the seller keep in mind that the buyer will be calculating its return on investment (ROI) when determining what price can be paid for the business. While a buyer will try to get the best price possible, most buyers are more interested in the ability of the business to continue generating the levels of discretionary earnings that a buying decision is generally based upon. That means deal structure, in-place managers, financing terms and similar issues influence the price they are willing to pay. Similarly, while the seller wants to achieve the best price possible from his or her standpoint, the terms of the deal – the buyer’s financing or capital capabilities and whether they have the right people – are are frequently of greater concern, particularly of the seller is concerned about the business’ future success which many sellers are.
Selling a Business: The Importance of TermsFlexibility on Deal Terms: In our experience, the terms on which any deal will be struck are many times more important to the parties than the price. This is particularly true with regard to financing and non-compete agreements. Partial cash and payments over time – essentially, seller financing – are increasingly common. Such terms broaden the scope of buyers if for no other reason than that few except the largest acquirers will be able to absorb the strain of paying all cash. Paying 100% of the purchase price at the closing table generally warrants – and buyers will demand – a discount to the sale price. If the seller is to participate in the financing, a price premium – as well as interest on the financed amount – increase the proceeds to the seller. Earn-outs provide the seller with the opportunity to realize an even greater price. Conventional purchases with large upfront payments can put a big strain on balance sheets, particularly on small to medium-sized acquirers. Partial and staged deals are now very common, reducing risk for acquirers and making transactions much easier to digest for them. However, vendors will need to find the terms acceptable and deals may falter if they are not. Large acquirers will be more likely to have access to finance than ambitious small and medium-sized ones, which might find it less easy to obtain the funds to support expansion. Vendors will want reassurance that funding is in place, so acquirers should have the evidence available to prove it.
The Bottom LineSelling a business takes time, work and attention – to both the business, so that it continues to generate earnings, and to the marketing and sale of the business. In my 20 years in the trenches, I’ve yet to meet a business owner capable of doing both simultaneously. But however it’s to be handled, paying attention the five topics above will make the transaction go more smoothly and possibly at a better price.
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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