Side Note: Though this post is about selling a business, at the end of last week’s post I wrote that there were additional lessons learned by the broker in that story and that I would address them in this week’s article. But things change.
We received a few comments and questions about a previous post that I thought should be addressed first. I’ll get to the additional broker lessons next week.
Selling a Business: What to Expect
In our line of work, we find that there are two general types of business owners.
One starts or buys a business with the intent to grow it and to ultimately sell it at a value significantly larger than when they started. The other is a business owner that operates their business for the income it produces without much thought to growing that income – and generally no thought at all to selling it.
Get the Business Ready
We meet with business owners all the time that just recently started thinking of selling. They come to us with an expectation that selling a business is like selling a house. This is like saying that replacing a part of your body is like replacing a part on your car.
My daughter recently had to replace the brakes on her car. She took it in to her service guy and picked it up the next day leaving me feeling reasonably comfortable with the knowledge that the damn thing will stop if she steps on the right pedal.
On the other hand, a close friend of mine just had lung transplant surgery. Doctors gave him a plan to prepare his body for the operation. The plan was to be implemented over a 12-month period. And because my friend adhered closely to the plan, the surgery was successful.
That describes – admittedly somewhat dramatically – the difference between selling a house and selling a business.
A seller needs to show any buyer “value”. Over the years we’ve encountered many businesses that were just not ready to be marketed. They may have needed a new business plan or organization structure. There may have been vacancies in one or two key roles. We’ve found out of date – or, worse, non existing – marketing plans.
And there is almost always a wide variety of accounting problems that need fixing. Such issues could take many months to remedy before we can start marketing a firm to prospective buyers.
Enlist the Right Advisors
Over the years, I’ve waxed philosophical on a regular basis about how important the right advisors are to a successful sale.
You need a qualified accountant. Not all CPAs have experience in minimizing the inevitable tax consequences of a business sale. If you want to keep more of the value your built, hire an accountant that knows have to do this.
You need a qualified attorney. Few attorneys have experience in the sale of businesses. The attorney that handled the closing for your house or the attorney that represented your kid in his speeding infraction are not the ones to call when selling your business. You want a “transaction attorney”.
Using your regular accountant or bookkeeper or attorney is a mistake for two main reasons. Not only is it probable they aren’t qualified but some may even throw up barriers to the sale because they know they’ll be losing a good client (you) after the sale.
Finally, seek the advice of a professional business broker, preferably one that is a Certified Business Intermediary (CBI).
Part of the preparation process is to find out what your business is likely worth in the marketplace. A CBI can provide a professional valuation that will be difficult for a buyer to argue with.
In addition, a professional business broker knows how to market a business to the widest scope of potential buyers – which will increase the chances of getting the best value – and can guide you through the negotiations.
Make sure your financial house is in order.
Compile at least three years of accountant-prepared financial statements. Audited statements are best but even compilations will carry FAR more weight with buyers – and with their advisors – than internal statements.
Make sure you have a detailed and accurate list of all inventory. A buyer knowledgeable about the industry will be able to look at that list while walking through the warehouse or yard or wherever the inventory is kept and have a sense of whether what he sees looks reasonable when compared to what’s on the list.
Make sure to have a comprehensive list of all assets that will transfer with the business; a good description of each, the year it was acquired and the estimated current market value.
List all contracts to which the business is a party and give an abstract description of each.
If real estate is part of the deal, get it appraised and include that appraisal in the Offering Memorandum.
Buyers are interested primarily in two things: how much “in-my-pocket” money will this business generate if I buy it and what am I going to have to buy to make that happen?
Have Realistic Expectations
More than 80% of small and mid-size business transfers include some measure of seller financing. It’s highly unlikely that you’re going to get paid entirely in cash at closing.
Most business owners have an exaggerated opinion of the value of their business. You aren’t going to sell yours for twice what it’s worth. Get a business valuation so you can avoid wasting valuable time and energy – to say nothing of the disappointment that accompanies any unsuccessful effort to sell.
Your continued involvement in the business will likely be part of the deal. A smart buyer is going to want you around for a while to help in the transition so plan on staying involved for anywhere from a couple of months to a year or more after the sale.
Post sale, no matter what a buyer says during negotiations, things will change. You’ll no longer be the boss. This is where relationships can really get strained. Be realistic. If you no longer own the company, recognize the fact that the new owner, having paid you handsomely for it, has the right to run it as he or she sees fit. Of course, if an earn-out is how the deal is structured, some precautions are in order but a transaction attorney and professional business broker are both sources of guidance for that.
The Bottom Line
Planning, preparation and the right advisors – and listening to them – are the three main keys to successfully selling a business. But the issues raised in this post are only part of the process – the business part.
There’s a personal part to selling a business that is no less important – and far more emotionally fraught. I’ll address that is an upcoming post.
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 safe and profitable week!