Selling a Business: Importance of Preparation
30 January 2023: Selling a Business: Importance of Preparation
Most business owners wait too long to prepare for selling their business. Few consider the upsides of preparation and the potential for problems – or even damage -if they don’t.
Why is this? Why are so few business owners prepared when it comes time to sell?
The reason we hear more than any other is, admittedly, the most legitimate; they’re too busy running their business. It’s hard enough to keep employees straight, the checkbook balanced, customers and clients happy, the tax man at bay, rodents out of the warehouse and the marketing people spelling the business’ name correctly. Selling the business is, in their minds, a far-off consideration – if it’s in their mind at all.
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We offer a comprehensive coaching program – both group coaching in our Brokers’ Roundtable community as well as one-on-one coaching – tailored to Realtors, business owners, buyers and anyone interested in valuing, buying or selling a business.
If you’d like to learn more, email me at jo*@Wo*******************.com
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So, why should a business owner prepare for what is, without question, an absolute inevitability? And if the answers to that question – and there are many – are logical, when should they start? When our brokers have this conversation with business owners, we encourage them to share my personal story.
“It Isn’t For Sale!”
A distribution business I started in the early 1990s was humming along nicely. We were signing up customers across the county and within three or four years, were exceeding US$1 million is revenue.
Out of the blue, someone showed up saying they wanted to buy the business.
But my business wasn’t for sale, a fact that I kept repeating during a couple of subsequent conversations. They were to prove me wrong.
Everything’s for sale – for the right price – and if you’re a business owner, that includes your business. If you’re unprepared, as I was, the dangers in the aftermath include not knowing if the price you got was fair, whether that number will be sufficient to support whatever you plan to do next and, arguably the most impactful, whether you even have a plan for what’s next because if you don’t, you’re likely to feel very lost – untethered to much of anything now that you’re no longer the owner of “your” business.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
But there are a dozen other reasons – many so-called “life events” – that argue that an owner should always be prepared; or at least prepared enough so that, should something untoward happen, chaos can be avoided and the direction of the subsequent discussions and events can be controlled by you at your pace and not under duress or, worse, in a panic.
Relationships
More than 50% of marriages end in divorce. Among my own siblings, there have been nine marriages and five divorces: 56%! (I’m from a LARGE family! Fortunately, I’ve had one of the former and none of the latter!)
Partnerships collapse all the time – though possibly not as often as marriages. I founded Worldwide Business Brokers in 2001 with a partner. For a couple of reasons, that partnership lasted only 12 months at which point I bought my partner out.
Given that we were in the business of valuing and selling businesses and still able to speak with each other without acrimony, our breakup was relatively painless. We both knew how to value what we had. But that’s an advantage few business owners share and for owners that have not prepared, negotiating a breakup agreement is a serious challenge and the likelihood of the retirement accounts of several attorneys being padded is high.
Three MORE Examples
Aside from the example I gave at the beginning of this post – that of someone showing up saying they wanted to buy my business – here are three more from our files that illustrate the need to always have the exit in mind.
Our clients, the married owners of a retailer of recreational products, wanted to retire. We met with them and explained that the process included a valuation – which we do on every business we are engaged to sell – for several reasons, including so that we know what to expect when we bring the business to market. But a valuation is also necessary so that clients can see what they’re likely to walk away from the closing with; and whether that would be enough to fund their plans for their post-closing life.
In this case, the business’ value was lower than what they’d anticipated; significantly lower. With revenue a whisker over $600,000 and discretionary earnings straining to reach $110,000, the value was woefully short of what they wanted. We didn’t accept the engagement and subsequently saw the business listed for sale on the regional multiple listing service by a residential realtor for $850,000. As you can imagine, it never sold.
A client we’ve previously written about was owned by five equal partners. It was a fast-growing healthcare-related business and the owners were advised by their insurance company to get life insurance policies in place for each of the owners just in case something happened. Because the business was growing so rapidly, the insurer required an annual valuation so that enough insurance was in place in the event of a problem. That “problem” occurred a few years later when one of the owners tragically died.
Finally, we were contacted by the respective attorneys for the husband and wife owners of a 20 year-old wholesale business offering an ultra high-end product to a handful of contractors developing luxury properties. The husband was the primary owner of the business but the wife had done significant work in the business with the understanding, according to her lawyer, that the business was to be jointly owned. Nobody involved prepared the business for its inevitable sale even if matrimonial bliss had lasted a lifetime. The angst, anger and attorneys fees could all have been minimized, if not eliminated, had the owners prepared the business for what could never be avoided – its eventual sale.
The Bottom Line
One of the most important aspects of being prepared is to have some idea of the value of the business. In every case we’ve been involved in, when the business owners need to sell all or part of their business, the business owners did not know what their business was worth when they called us to say they wanted to sell. They also hadn’t done any of the other “prep” work that would have made their business far more attractive to potential buyers.
Before selling a business, we try to get owners to think about their exit options, understand the value of their business and what it might take to unlock that value, and to recognize their goals, particularly what they plan to do post-closing.
When we help people in the startup phase of their business, we advise them to think long term; to recognize that, if their business is successful, it will eventually be sold and to think about what they want that business to look like not only in 20 or 30 years when they’re ready to sell but what it looks like every year in the event it has to be sold.
Our tagline – “Every Business That Doesn’t Fail Will be Sold… Every one!” – is demonstrably true. When we meet with business owners, our discussion addresses the fact that none of us will live beyond a normal human lifespan – and even that, only if we’re lucky – and we ask them to think about what will happen to their business when their time comes. We also tell them about the healthcare business that lost an owner and that the random truck theory of life could impact any of us the next time we get on the highway.
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.
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
Searching For…
We’ve been contacted by a small U.S.-based lower middle-market PEG opportunities in testing, inspection, certification, and compliance (lab equipment, healthcare facilities and the like) with at least $250,000 in discretionary earnings.
If any of you know of something that might fit, please let me know.
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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 500 in the world. He can be reached at jo*@Wo*******************.com