2 September 2024: Selling a Business: The Transition
Last week’s post started with the following statement: “Selling a business is a complex and often emotional process that requires careful planning and execution. For many business owners, it’s the culmination of years of hard work and dedication.”
The emotional aspect of selling is significant, seldom discussed and very often emotionally and psychologically debilitating.
As many of you know from reading stories on this blog and on our website, in 1997, I sold a business I’d started in 1991. The business wasn’t for sale but the investors that approached me about buying it eventually convinced me otherwise.
WHAT WE’RE LOOKING FOR: Technology and Media businesses: Revenue $10M+ Distressed okay Location: Continental U.S and Canada
in**@Wo**********************.com
Because the business wasn’t for sale, I had no plans for life after the business but fortunately, my personal situation at the time, allowed me a great deal of freedom and the capital to randomly jump into some adventures which, in the span of a few weeks, helped me get out of my funk and back in the driver’s seat.
But my experience is atypical and our brokers know that, as part of the work we do to prepare our clients for as many of the eventualities of selling as possible, we have to prepare them for what might happen post closing. Though there will always be some level of emotional impact, one of the more likely effects will be a transition period during which the seller, as a condition the buyer requires to do the deal, stays on with the business for some negotiated period of time.
__________________________________________________________________________________
Are you a business owner? A Realtor? A business broker? Are you looking for a business to buy? Do you have questions about the selling or buying process, the valuation, marketing the business, deal structure, financing or some other business issue?
You can find the answers in The Brokers Roundtable℠. Our Members include seasoned business brokers, commercial real estate experts, valuation specialists, financing professionals, attorneys, accountants and all the other talent associated with what we do.
Sign up for a 90-day test drive The Brokers Roundtable℠. Access the talent – or just see what’s going on in our industry!
___________________________________________________________________________________
There can be many reasons for this requirement and the level of complexity of the business or the seller’s day-to-day interaction and personal relationship with the business’ customers, clients and/or supplies are among them.
Why Stay On?
As most of you who’ve been following this blog know, earn-outs are one reason.
Earn-outs are often used to close the gap between what the seller believes his or her business is worth and what the buyer wants to pay for it. An earn-out is also used when the business is sold, in whole or in part, to a private equity firm, such buyers usually want the management team, including the seller, to stay on for the duration of the PE firm’s ownership. (This sometimes allows our client to “sell their business twice“.)
Training in another reason that the seller often stays on. If the operations of the target business are complex or require certain skills or difficult-to-obtain certifications, the buyer, though fully expecting to operate the business, will often require the seller to stay with the business for an extended period; one long enough to fully train the buyer or for the buyer to obtain the required certifications.
But outside of the terms of an earn-out, the length of time of any of these transition periods will depend on a multitude of factors, all related to training and owner relationships.
Finding the Right Buyer
For example, buying a Subway sandwich shop is unlikely to require a lengthy transition period. Not to be demeaning in any way, but learning how to run a sandwich shop is unlikely to take more than 30 days or so. Similarly, assuming the buyer is an accountant and performed the necessary due diligence, the length of the transition period when acquiring an accounting firm might last a few weeks to a couple of months; enough time for the buyer to meet the major clients. These specific examples could be generalized to include real estate agencies, small retailers, etc., where due diligence, relative operational simplicity and buyer experience might not necessitate a lengthy transition period.
Conversely, in the case of the acquisition of a small specialty metal fabricator with a short list of high-value clients, the buyer would want not only to feel comfortable that he has mastered the operational and fabrication processes but also that there were some assurances that the business’ customers were likely to remain with the company. A longer transition period – a year, maybe? – might be required.
__________________________________________________________________________________
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.
Customer Retention
While all these examples come from our files, this general discussion has it source in the experience of a friend of mine.
This friend and his brother owned a small regional manufacturing business supplying retailers with home goods. The business was started by the brothers’ father and the family had built a solid reputation for high quality products, excellent service and prompt deliveries. The relationships with some customers were developed over two generations and those relationships were important – to the buyer.
As it happened, the brothers found a buyer that was well-capitalized and was ready to pull the trigger. But the buyer needed certain assurances, one of which was that the company’s largest customer would continue to buy.
As the story goes, a meeting was called and attended by the brothers selling, three representatives of the buyer and the president of the business’ largest customer. Before the buyers would make the final commitment to buy the business, they had to make sure that the customer would still be on board with the company after the sale.
When the customer was asked that question by the buyers, he leaned back in his chair and, instead of looking at the buyers, looked at the brothers and asked “Are you guys staying with the company after the sale?” One of the brothers answered that both had signed on for a minimum of two years. After receiving that answer the customer looked the soon-to-be owners in their eyes and said that, given that commitment, he would then continue to buy the business’ products.
The Bottom Line
If you’re selling a business – as a broker or an owner trying to do this yourself – you have to realize that there are many reasons a buyer will require a transition period; a period during which the proverbial baton is handed off to the buyer. The structure of the deal and the type of buyer will, along with the type and complexity of the business itself, determine whether that period is two weeks, six months, or, as in this case, years.
Brokers, prepare your clients. Business owners, prepare yourselves. Selling a business is marathon, not a sprint. Understand the process (a 6-Part series on that process is here), plan and be patient.
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…
NOTE TO READERS: Our “Searching For…” feature has been moved to our online community, The Brokers Roundtable℠. It will appear there exclusively.
#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions #buyabusiness #sellabusiness #realtor #realestateagents
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