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Article added or updated:
03/30/2008 |
THE TEN COMMANDMENTS OF SELLING MY PRIVATELY HELD
BUSINESS
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06/08/05
By David M. Kauppi, CBI, President Mid Market
Capital
Related Artcles:
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Sell Your Business
1. Thou shall not wait too long. Have you ever heard, “I sold my
business too early?” Compare that with the number of times you’ve heard
somebody say, “I should have sold my business two years ago.”
Unfortunately, waiting too long is probably the single biggest factor in
reducing the proceeds from the sale of a privately held business. The
erosion in business value typically is most pronounced in that last year
before exiting. The decision to sell is often times a reactive decision
rather than a proactive decision. An individual who spends 20 years
running their business and controlling their outcomes often behaves
differently in the exit from his business. The primary reasons for
selling are events such as a serious health issue, owner burnout, the
death of a principal, general industry decline, or the loss of a major
customer. Exit your business from a position of strength, not from the
necessity of weakness. Don’t let that next big deal delay your sale. You
can reward yourself for that transaction you project to close with an
intelligently written sale agreement containing contingent payments in
the future if that event occurs.
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2. Thou shall be prepared personally. We all create business plans both
formally and informally. We all plan for vacations. We plan our parties.
We need to plan for the most important financial event of our lives, the
sale of our business. Typically a privately held business represents
greater than 80% of the owner’s net worth. Start out with your plans of
how you want to enjoy the rewards of your labor. Where do you want to
travel? What hobbies have you been meaning to start? What volunteer work
have you meant to do? Where do you want to live? What job would you do
if money were not in issue? You need to mentally establish an identity
for yourself outside of your business.
3. Thou shall prepare my business for sale. Now that you are all excited
about the fun things you’ll do once you exit your business, it’s now
time to focus on the things that you can do to maximize the value of
your business upon sale. This topic is enough content for an entire
article, however, we will briefly touch upon a couple of important
points. First, engage a professional CPA firm to do your books. Buyers
fear risk. Audited or reviewed financial statements from a reputable
accounting firm reduced the perception of risk. Do not expect the buyer
to give you credit for something that does not appear in your books. If
you find that a large percentage of your business comes from a very few
customers, embark on a program immediately to reduced customer
concentration. Buyers fear that when the owner exits the major customers
are at risk of leaving as well. Start to delegate management activities
immediately and identify successors internally. If you have no one that
fits that description and you have enough time, seek out, hire and train
that individual that would stay on for the transition and beyond. Buyers
want to keep key people that can continue the momentum of the business.
Analyze and identify the growth opportunities that are available to your
business. What new products could I introduced to our existing customer
base? What new markets could utilize our products? What strategic
alliances would help grow my business? Capture that in a document and
identify the resources required to pursue this plan. Buyers will have
their own plans, but you’ll increase their perception of the value of
your business through your grasp of the growth opportunities.
4. Thou shall keep my eye on the ball. A major mistake business owners
make in exiting their business is to focus their time and attention on
selling the business as opposed to running the business. This occurs in
large publicly traded companies with deep management teams as well as in
private companies where management is largely in the hands of a single
individual. Many large companies that are in the throws of being
acquired are guilty of losing focus on the day-to-day operations. In
case after case these businesses suffer a significant competitive
downturn. If the acquisition does not materialize, their business has
suffered significant erosion in value. For a privately held business the
impact is even more acute. There simply is not enough time for the owner
to wear the many hats of operating his business while embarking on a
full-time job of selling his business. The owner wants the impending
sale to be totally confidential until the very last minute. If the owner
attempts to sell the business himself, by default he has identified that
his business is for sale. Competitors would love to have this
information. Bankers get nervous. Employees get nervous. Customers get
nervous. Suppliers get nervous. The owner has inadvertently created
risk, a potential drop in business and a corresponding drop in the sale
price of his business.
5. Thou shall get multiple buyers interested in my business. The
“typical” business sale transaction for a privately held business begins
with either an unsolicited approach by a competitor or with a decision
on the part of the owner to exit. If a competitor initiates the process,
he typically isn’t interested in over paying for your business. In fact,
just the opposite is true. He is trying to buy your business at a
discount. Outside of yourself there is no one in a better position to
understand the value of your business more than a major competitor. He
will try to keep the sales process limited to a negotiation of one. In
our mergers and acquisitions practice the owner often approaches us
after an unsolicited offer. What we have found is generally that
unsolicited buyer is not the ultimate purchaser, or if he is, the final
purchase price is, on average 20% higher than the original offer. If the
owner decides to exit and initiates the process, it usually begins with
a communication with a trusted advisor – accountant, lawyer, banker, or
financial advisor. Let’s say that the owner is considering selling his
business and he tells his banker. The well- meaning banker says, “One of
my other customers is also in your industry. Why don’t I provide you an
introduction?” If the introduction results in a negotiation of one, it
is unlikely that you will get the highest and best the market has to
offer.
6. Thou shall hire a Mergers and Acquisitions firm to sell my business.
You improve your odds of maximizing your proceeds while reducing the
risk of business erosion by hiring a firm that specializes in selling
businesses. A large public company would not even consider an M&A
transaction without representation from a Merrill Lynch, Goldman Sachs,
Solomon Brothers or other high profile investment banking firm. Why?
With so much at stake, they know they will do better by paying the
experts. Companies in the $3 Million to $50 Million range fall below
their radar, but there are mid market M&A firms that can provide similar
services and process. Generally when you sell your business, it is the
one time in your life that you go through that experience. The buyer of
the last company we represented for sale had previously purchased 25
companies. The sellers were good business people, knew their stuff, but
this was their first and probably last business sale. Who had the
advantage in this transaction? By engaging a professional M&A firm they
helped balance the M&A experience scales.
7. Thou shall engage other professionals that have experience in
business sale transactions. You may have a great outside accountant that
has done your books for years. If he has not been involved in multiple
business sales transactions, you should consider engaging a CPA firm
that has the experience to advise you on important tax and accounting
issues that can literally result in swings of hundreds of thousands of
dollars. What are the tax implications of a stock purchase versus an
asset purchase? A lower offer on a stock purchase may be far superior to
a higher offer on an asset purchase after the impact of taxes on your
realized proceeds. Is the accountant that does your books qualified to
advise you on that issue? Would your accountant know the best way to
allocate the purchase price on an asset sale between hard assets, good
will, employment agreements and non-compete agreements? A deal attorney
is very different from the attorney you engage for every day business
law issues. Remember, each element of deal structure that is favorable
to the seller for tax or risk purposes is generally correspondingly
unfavorable to the buyer, and vice versa. Therefore the experienced team
for the buyer is under instructions to make an offer with the most
favorable tax and reps and warranties consequences for their client. You
need a professional team that can match the buyer’s team’s level of
experience with deal structure, legal, and tax issues.
8. Thou shall be reasonable in my expectations on sales price and terms.
The days of irrational exuberance are over. Strategic buyers, private
equity groups, corporate buyers, and other buyers are either very smart
or do not last very long as buyers. I hate rules of thumb, but generally
there is a range of sales prices for similar businesses with similar
growth profiles and similar financial performance. That being said,
however, there is still a range of selling prices. So, for example,
let’s say that the sales price for a business in the XYZ industry is a
multiple of between 4 and 5.5 times EBITDA. Your objective and the
objective of a good M&A advisor is to sell your business at the top end
of the range under favorable terms. In order for you to sell your
business outside of that range you must have a very compelling
competitive advantage, collection of intellectual property, unusual
growth prospects, or significant barriers to entry that would justify a
premium purchase price. If you think about the process of detailing your
car before you offer it for sale, a good M&A advisor will assist you in
that process for your business. Let’s say, for example, that 4 to 5.5
multiple from above was the metric in your industry and you had an
EBITDA for the last fiscal year of $2.5 million. Your gross transaction
proceeds could range from $10 million to $13.75 million. A skilled M&A
firm with a proven process can move you to the top of your industry’s
range. The impact of hitting the top of the sales price range vs. the
bottom more than justifies the success fee you pay to your M&A
professionals.
9. Thou shall disclose, disclose, disclose, and do it early. A seemingly
insignificant minor negative revealed early in the process is an
inconvenience, a hurdle, or a point to negotiate around. That same
negative revealed during negotiations, or worse yet, during due
diligence, becomes, at best, a catalyst for reexamining the validity of
every piece of data to, at worse, a deal breaker. No contract in the
world can cover every eventuality if there is not a fundamental meeting
of the minds and a trust between the two parties. Unless you are lucky
enough to get an all cash offer without any reps and warranties, you are
going to be partnered with your buyer for some period in the future.
Buyers try to keep you on the hook with reps and warranties that last
for a few years, employment contracts, or non-competes that last, escrow
funds, seller notes, etc. These all serve a dual role to reduce the risk
of future surprises. If future material surprises occur, buyers tend to
be punitive in their resolution with the seller. Volunteer to reveal
your company’s warts early in the process. That will build trust and
credibility and will ensure you get to keep all of the proceeds from
your sale.
10. Thou shall be flexible and open to creative deal structure.
Everything is a negotiation. You may have in mind that you want a gross
purchase price of $13 million and all cash at close. Maybe the market
does not support both targets. You may be able to get creative in order
to reach that purchase price target by agreeing to carry a seller note.
If the sale process produces multiple bids and the best one is $11.3
million cash at close. You may counter with a 7-year seller balloon note
at 8% for $3 million with $10 million cash at close. If the buyer is a
solid company, that may be a superior outcome than your original target
because the best interest return you can currently get on your
investments is 4%. Be flexible, be creative, and use your team to
negotiate the hard parts and preserve your relationship with the buyer.
You may have spent your life’s work building your
business to provide
you the income, wealth creation, and legacy that you had planned and
hoped for. You prepared and were competitive and tireless in your
approach. You have one final act in your business. Make that your final
business success. Exit on purpose and do it from a position of strength
and receive the highest and best deal the market has to offer.
David Kauppi is a Merger and Acquisition Advisor
with Mid Market Capital, Inc. MMC is a private investment banking and
business broker firm specializing in providing corporate finance and
business intermediary services to entrepreneurs and middle market
corporate clients in a variety of industries. Dave is a Certified Business
Intermediary (CBI), a licensed business broker, and a member of IBBA
(International Business Brokers Association) and the MBBI (Midwest
Business Brokers and Intermediaries). For more information or a free
consultation please contact Dave Kauppi at (630) 325-0123, email
davekauppi@midmarkcap.com or visit our Web page
www.midmarkcap.com.
Related Artcles:
Buying a Business
Company Website Value
Strategic
Acquisition
Selling Tech Company
Maximize Business Value
Selling Your Business
Sell Your Business
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