Jackpot!Posted on Tuesday, March 2nd, 2004 by John McPartlin
Selling your business is one of the toughest things you’ll ever do, and you needed to start planning for it yesterday. A primer for cashing out—from dealing with brokers to creating an exit strategy.
Business consultant Debbie Allen doesn’t mince words when it comes to advising entrepreneurs about selling their companies.
“You have to build value from the beginning,” says Allen, of Scottsdale, Ariz.–based Allen & Associates Consulting Inc. “Most people don’t think about that until they’re ready to sell. They wait too long and get tied up in too many things.” In short, the minute you launch a business, start thinking about how it might look to a prospective buyer in a few years.
Those who wait until the last minute to think about how to sell their business also run the risk of selling when the firm is at its lowest value. “The best time to sell is when the business is solid—not when it’s gone down because you’ve lost both your passion and your market share,” says Allen, who built and sold seven companies before turning to consulting. “Sell at the top of your game.”
“You don’t sell your car after you blow an engine; you sell it when it’s running well,” says Ed Paulson, consultant and author of The Complete Idiot’s Guide to Buying and Selling a Business (Macmillan, 1999). “If you know you’re planning to sell within a certain period of time, don’t wait until the last minute to sell it. You want to get the most for your business as opposed to having a fire sale.”
Just as you would create a business plan for launching your company, Allen suggests putting together a selling plan. This plan, or portfolio, which can be updated regularly, should include financial statements, customer lists and the value of employees. Having a plan makes it much easier to negotiate a sale if unexpected circumstances—deteriorating health, divorce, a sudden decline in profits, relocation—make selling the business a priority. At the very least, you should have profit-and-loss statements, balance sheets and tax returns for the past three years.
Having all your ducks in a row also puts you in a good spot if someone makes an unexpected offer for your business.
“It takes a long time to sell a business. It just doesn’t happen overnight,” says Gary Nathan, who sold a chain of Wisconsin funeral homes in 1997 before he became a business broker himself.” Sometimes it takes two or three years. You can’t simply wake up one morning and decide to sell your businesses. It’s all about planning and following through.”
Nathan said he first started thinking about selling his business in 1994 but realized it wasn’t ready. He decided to clean up operations, pay down some debt and get the right staff in place. In 1997, his business was in great shape and, luckily for him, large corporations were gobbling up funeral homes. “We did everything we needed to do,” he says. “We were at a point where the business had become appealing to buyers.”
Allen recounts the tale of a friend who owned a staffing agency and was surprised one day when another company asked to meet with her to discuss a sale. The company had researched all the staffing firms in the area and decided hers was in the best shape. When they sat down to talk, the company’s representatives wrote an unexpectedly high purchase price on a slip of paper and slid it over to her. She was so stunned she didn’t say anything. Thinking she was playing hardball, they quickly offered to take on all her employees, buy her receivables and do whatever else was needed for a smooth transition. When she finally conceded, they asked how soon she could sell. “I can be out of my office in 10 minutes,” answered the woman.
Hiring a Broker
Once you’ve decided to sell, how do you decide the value of your business and get the word our that it’s available? In the sae way most people turn to real estate brokers when it’s time to sell their house, you should consult with a business broker to walk you through the tentative first steps of a sale, experts say.
“It’s helpful to bring in an independent person to give you an objective assessment of your business,” says Paulson.
“[Owners] have a tendency to be biased in how they see their business. Some clients think their business is perfect; other clients think their business is no good at all.”
Picking a broker involves more than just opening a phone book and calling the first one you see. Allen recommends shopping around for the best fit for your business. “I interviewed 12 brokers before I hired one,” she says. “You have to ask them the right kind of questions and let them sell themselves to you.”
Hiring a broker should be like hiring an employee, Allen says, and the process should be just as rigorous. You want brokers who are aggressive, have strong sales skills and possess enough expertise to handle being challenged. Some of the brokers Allen rejected were too reticent and waited for her to provide all the answers instead of speaking up. The last thing she needed during heated negotiations was someone waiting around for her to make the next call.
When looking into business brokers, everything is negotiable—including their fee. It’s a good idea to have several brokers bidding for the chance to sell your business, because that’s the best way to strike a good deal. In addition, you can try to structure your agreement so that the broker doesn’t get a commission if you make the sale yourself without his or her involvement. In some cases, a broker will agree to this if he or she really wants to make a deal in a competitive environment. “I looked for someone who wouldn’t want a commission for something he didn’t work on,” says Allen. “I negotiated that and, in the end, it saved me $30,000. You have to ask for these things up front because that’s when they are trying to get your business.”
Setting the Price
There are many ways to figure out how much your business is worth. The simplest method involves getting “comps” based on other businesses in the area that are similar to yours and have recently sold. A business broker can help you gather and analyze these data. It’s important to get as broad a range of comparable businesses as possible, Paulson says. This can be a challenge—especially if you own a niche business or if similar companies in your area are private.
A good business broker can help you evaluate a variety of pricing methods—including discounted cash-flow analysis, net income minus earning power and simple multiples of income—and decide which one works best for you.
You have to rely on the hard numbers and not get distracted by the more emotional elements of the business when setting a price, says Allen. “You can’t get a dollar amount for things such as staff, customers and location. There are no guarantees for that stuff. The real value is what comes in and what you make,” she says.
Ultimately, the key is to set the right price. If the price is unrealistic, it will only add to the amount of time it takes to sell the business and distract you from running your company and planning what you’re going to do next. A low price may speed the process, but not without taking a bite out of your wallet.
Ideally, you’ll want to get cash up front. More than likely, however, you will have to settle for some mixture of cash, stock and payment in installments over two to seven years. If that’s the case, be sure to get a substantial interest rate—in the range of 10 percent—to make it worth your while, advises Irwin Rudick, a counselor with the San Diego, Calif., chapter of the Service Corps of Retired Executives.
“Make sure the buyer has an excellent credit rating,” says Rudick, who has built and sold several businesses. “If you can get collateral, that’s great. Solidify the deal as much as possible so that if it goes sour, you don’t lose.”
Of course, selling your business also affects your employees. How soon should you let them know you’re planning to sell? Telling them too soon can be an unnecessary distraction, but not telling them until the last minute can create bad blood and cause your buyer some serious headaches.
“In general, I believe you’re better off keeping the decision confidential as long as possible, because change scares employees,” says Paulson. “They want to know who the new management is and whether they will keep their jobs. You create uncertainty where there is no need for uncertainty.”
If you announce that you’re selling and then can’t sell the company for a long time, Paulson says, employee morale will be harmed. However, once negotiations have become more solid, he advises, you should sit down with your employees and spell everything out to avoid leaks and misinformation. “The employees eventually will have to be involved as the buyers go through due diligence. But at that point, you’re far enough down the road to know what the deal is going to look like,” he says.
Entrepreneur Larry Webster took a somewhat different tack when he sold his chain of Wisconsin convenience stores last year. “We had a loyal staff, and right from the beginning, I let it be known that anything I have can be for sale at any time,” he says. “A month before we closed, we let the managers know and set up a meeting with the buyers—even though a lot of closings never go through—just so my team would feel secure. That way, [morale] was never an issue.”
In some cases, Allen says, your best buyer prospects could be among your employees, so you may want to selectively leak your plans to leave the business. “There’s lots of opportunity to sell your business internally,” she says. “I sold a business to one of my managers and sold another to a salesman who had been there only two months.”
Whether or not you choose to tell your employees about the sale, you should be working behind the scenes to make sure they are protected during the transition. “Employees are part of the value of a sale,” says Allen. “You want to give them a bonus or a percentage of the business sale if possible.”
OK, you sell the business. Now what?
Consultants say you should examine your sales contract, and make sure you understand any noncompete restrictions the buyer may have included. Some of these clauses may restrict you from launching a similar business in the same area—say, within 50 to 100 miles—while others might restrict you from competing in the same industry. Unless you’re making enough on the sale that you don’t have to worry about money, any noncompete clause that keeps you from making a living should raise red flags and be renegotiated.
Once you hand over the keys, you still might have a little work to do. The new owners might ask you to stay with the company as a consultant. It’s generally good form to set aside at least two to four weeks to help the new owners learn the ropes of the business and introduce them to your customers.
Selling your business provides you with a great opportunity to try something new, says Allen. You can take what you’ve learned and turn it into a new career in teaching, consulting, training or even writing a book about your experiences. Having an exit strategy takes a lot of the fear away from selling, she says. “What do I enjoy doing? What do I want to do next? How do I use the expertise I have in a different way to create a completely different business for myself?”
In the end, consultants agree that once the sale is final, you have to make a cold break and move on. The new owners could turn your old company into a multinational corporation or run it into the ground. Either way, you can’t look back.
“You have to divorce yourself from the business. It’s just a commodity now,” says Rudick. “Like a stock, it might go up and it might go down. There’s no use having any regrets that you sold when you did.