CHAPTER 1
Strategy on Selling
HOW COULD I POSSIBLY SELL MY BABY?
Most of my brokerageâs business owner clients fall into one of two buckets. If youâre in the first group, you can hardly believe youâre considering selling your business. Until recently, it was unimaginable to you. Youâve poured your blood, sweat, and tears into it. Itâs consumed your time and maybe even your identity. But just like I did with my companies, youâve decided youâre ready to move on to something else. It can be a difficult, emotional decision that can feel like walking away from a beloved child.
If youâre in the second group of owners, your business has become an insolent teenager who does what it wants and doesnât listen to a thing you say anymore. Your life has become about serving a business baby that has no empathy for your needs. You take a long weekend for the first time in what feels like years. And BOOM! Youâre barely gone for a few hours before your manager quits, the HVAC system goes out, the website crashes, or a top client doesnât receive their order. You spend the entire âvacationâ solving problems remotely, only to come home even more exhausted than when you left. Itâs time for someone else to take on the burden. Itâs time for your business baby to fly the coop, and it canât happen soon enough.
Either of these situations can feel overwhelmingâeven paralyzingâfor the owner. Realize that youâre going to exit the company one day, whether by force or by choice. Youâve taken the first step in deciding to move on, and that was hard enough. Unfortunately, thereâs still much to be done. You need to lead the charge to an outcome that will bring you maximum value and create the best result for your company. All this takes preparation and hard work, but the results are well worth it.
THE BEST LAID PLANS . . .
Life, and the humans in it, are unpredictable and uncontrollable. In fact, many of the most unpredictable and uncontrollable people I know are entrepreneurs (it takes one to know one, right?). Many entrepreneursâincluding meâthought weâd never, ever sell our business, or assumed it was so far in the future that it wasnât worth considering. Itâs a nice thought, but ultimately, you donât get to make that decision. All entrepreneurs leave their businesses, either walking out the front door head held high, or being carried out feet first.
You Need Exit Options, Not an Exit Plan (Yet)
Most business brokers will tell you that you need to design an exit plan right now. An exit plan is a definite decision about how you will exit the company, what youâll get out of it, and when it will happen. Some less scrupulous brokers will happily take a bunch of your money to put together a beautifully bound, 100-page exit plan booklet explaining how itâll all happenâand itâs a work of complete fiction. Iâm here to tell you that you donât need an exit plan, at least right now. What you need are exit options, which are strategies designed in advance that provide a long-term path to success, while also preparing you in case of the need for a quick exit (more on this later in the chapter).
For small to medium businesses, there are only four possible outcomes that you can choose (assuming you donât choose to get carried out feet first):
- You milk the company for all the cash itâs worth, and board up and walk away when youâre done.
- You sell the business to a third party.
- You sell the business to a key employee.
- You transition the company to a family member or business partner.
Unless youâre looking to exit as soon as possible, you donât necessarily need to select right now which outcome is your preferred choice. You should, however, be prepared for any of these four possibilities. That way, if something unexpected arises, youâre ready to tackle it without having to scramble.
Hopefully, one day long in the future, you will make a definite exit plan. But until that day comes, you need to arm yourself with exit options. Donât put it off. I canât tell you how many clients Iâve worked with who say theyâll work on exit options in a year or two, and come to regret it.
HOW DO I FIND A BUYER?
One of the most frequent questions from business sellers is how they will find their buyer. Thereâs no such thing as newspaper classified ads or open houses where potential buyers can see what businesses are on the market. Should owners put a sign in the window? Advertise online? Are there other methods they donât know about? I even heard of a business owner who tried to give away his company to a college student in exchange for some future royaltiesâalthough I donât recommend this tactic.
One source of buyers is through your existing industry connections. In a tight-knit industry or one where mergers and acquisitions (M&A) are popular, such as the wealth management space, owners can find buyers through their network, including using reverse cold-calling or getting introduced through a mutual acquaintance.
There are direct marketing options for owners determined to do it themselves, but youâre taking a major risk if you go this route. You can advertise on business sales websites and cold call potential buyers. It can get the job done, but it loses the biggest group of potential purchasers: the individual buyers, who usually go to brokers and bankers first.
Get a Business Broker
You may be tempted to think you can find a buyer on your own, but donât be so sure. Most owners know a lot about running their company, but almost nothing about selling it. The best way to find buyers is through business brokers or investment bankers. If your company is worth less than $25 million (more on valuation later in this chapter), youâre likely to use a broker. If itâs over $25 million, youâll probably use an investment banker. Both accomplish the same goal: finding the right buyer and selling the business. They create competition for your deal by using confidential advertising and marketing strategies sellers usually canât create on their own. In many cases, brokers can create a market for the company that wouldnât exist without them.
There is a big difference between finding a buyer and getting a deal done. At least half of all deals fall apart after a buyer is identified, and owners without experience in buying and selling businesses can stumble in this area. The owners of a medical company reached out to our brokerage in desperation. The owners had been trying to sell it themselves, and had even gotten a few nibbles, but couldnât get a deal done. Theyâd had it on the market for four years; as soon as they hired our business brokerage, the company sold within four months at a price 50 percent higher than the owners expected.
Buyers also treat sellers without brokers differently. Some will take advantage of the situation. Knowing there is no one whoâs particularly deal-savvy involved in the transaction, theyâll try to underprice their offer or insert nefarious deal terms that can create a nightmare for former owners down the road. Other buyers are wary of buying businesses that donât have third-party representation, and assume the company is somehow of a lower quality. A broker can help both sides feel confident the sale is being negotiated under standard market terms. Perhaps most importantly, a broker knows how to market your company confidentially. If employees and customers find out youâre selling, thereâs a huge risk that theyâll leave, and youâll be left with nothing at all to sell.
SO, WHO ARE THESE MYTHICAL BUSINESS BUYERS?
Most business owners looking to sell think of buyers as either larger companies or private equity firms. Thereâs something romantic about a group of deep-pocketed experts recognizing the hidden gem that is your lifeâs work. In reality, those buyers are the minority. Whoever or whatever buys your business, you want to find your âmost probable buyerââthe one who will pay the most, be the easiest to make a deal with, and provide the best legacy for your company.
There are a variety of entities looking to buy companies:
- IndividualsâThese are typically business veterans who have worked extensively in the corporate world. Theyâve always dreamed of owning their own business, and have decided buying is a better strategy than starting one themselves. Individuals make up about 80 percent of business buyers. Many sellers, lost in their daydream of a private equity firm dumping a truckload of cash on their front lawn, totally ignore this group of buyers at first. Do this at your peril: itâs highly likely that your buyer will be one of these individuals, and that theyâll provide you with a better deal than any alternative.
- Strategic / SynergisticâThese buyers are businesses that are either a direct competitor or in a similar enough industry that combining with your company will increase its growth factor. Many times, they come from a different region or market and are looking to expand into yours. These companies are generally just a bit larger than yoursâusually 25 to 75 percent larger. Put away the notion that a large, billion-dollar company is going to acquire your $1 to $2 million revenue business. Multinational firms have huge M&A divisions, and it takes a much more sizable EBITDA (earnings before interest, taxes, depreciation, and amortizationâmore on this later in the chapter) for them to even give you a sniff.
- Private EquityâPE groups are collections of investors looking to buy a business, grow it over three to seven years, and then sell it for a premium. Theyâre typically only interested in companies with EBITDAs of more than $1 million per year. Considering only 4 percent of US companies even achieve revenue of more than $1 million per year, these buyers are looking at less than 1 percent of the market. Plus, theyâre very particular about elements like industry, growth prospects, ownerâs role, and people in the organization. PE firms are likely to offer deal structures that shift the risk back onto the seller, and often try to change terms close to closing. Generally, PE deals are bad for sellers.
- FlippersâYes, they exist, and yes, theyâre similar to house flippers. These buyers are looking for a company where they can add value with their individual skill sets and then sell in one to three years. These buyers typically donât pay the most, but they move quickly and can be great for sellers who appreciate speed. Flippers are also willing to put in the hard work to turn around struggling companies and may be ideal for sellers in sticky situations.
- InternalâYou can also sell your business to someone who already exists in your world. It may be your general manager, your child, or a business partner. These buyers are great for the legacy of the company because they already understand the company ethos. The deal can present financial challenges if the buyer canât come up with an adequate down payment or qualify for full financing, which can also lengthen the process. This type of sale can also involve additional emotional factors that can complicate the process.
Even successful sellers usually have only a small handful of bidders. And thatâs okay! The best buyer, after all, is the one you can get to the closing table. Find as many potential buyers as possible and rank them by your preferred method of transaction. Remember, increasing the number of possible buyers increases competition for your sale. This improves the likelihood that your company will sell, and increases the price youâll get for it.
WHY WOULD ANYONE WANT MY BUSINESS?
The first time you thought about selling your business, the first question that probably popped in your mind was, Whatâs my business even worth? Unfortunately, thereâs no simple answer. Despite what the internet told youâshocking, I knowâthereâs no single surefire way for most people to value a business. Itâs part art and part science. No matter how many rules of thumb you apply, online calculators (even ours!) you reference, or âindustry expertsâ you consult, itâs hard to predict what a willing buyer and willing seller will agree is a fair price in neutral market conditions. Ultimately, you wonât get an accurate valuation until you go to a business broker and put your company on the market. And up until that point, most owners live in a fantasy world when they think about the value of their company, assuming itâs either worthless or priceless.
Your Baby Isnât That Ugly . . .
Some owners think they have the ugliest, most foul-mouthed child on the planet, and are certain no one else would want to run it, let alone pay for the privilege. Chances are that these owners are wrong. Just like parents with unruly children, owners are often too close to the company to separate the bad times from the good and see all theyâve accomplished.
Almost all companies have some value that will attract buyers. Itâs just a matter of identifying the thing(s) of value, understanding the likely buyer, and determining what theyâre willing to pay for it.
You may walk away with only $10,000 instead of the $10 million you were hoping for, but unlocking that value is still better than shutting the doors and walking away.
. . . But It Isnât That Gorgeous Either
Other owners think they have a golden child, a company that is beautiful in every way and can do no wrong. Its value is outweighed only by its potential! Surely any buyer would jump at the chance to buy this once-in-a-lifetime company! And indeed, maybe you are sitting on the next Facebook. But itâs far more likely y...