Featured articles to help sell a business
A Seller’s Four Potential Mistakes
Here are four common mistakes sellers make when considering the sale of their company.
- Bad Timing – As they say, “timing is everything.” Sellers too often pick the wrong time to sell their company. For example, a 63-year-old owner may decide to wait until he is 65 to sell. The market is good now, so by waiting 2 years, the owner places the sale in uncharted waters. Then, there is the owner who really wants to sell, but wants to “Wait until the market comes back” – whatever that means. (See number four in this article!)
- Not Prepared – Selling a middle-market sized business is not done on a whim. It can take a long time to gather the information and documentation necessary to prepare it for sale. For example, financial statements should be audited; non-competes signed by key employees; any pending legal, environmental or governmental issues resolved; etc.
- Not Everyone Agreed – It is critical that all owners, including family members if they are also owners, be in agreement that the company is to be sold. Too many pending sales fall apart because a family member or stockholder decides at the last minute he or she doesn’t want to sell.
- Ignoring the Sixth Sense – This is sometimes referred to as the “gut feeling”. No one knows the business like the owner. Owners should listen to the instincts. When that old gut feeling says, “Now is the time to sell,” it probably is.
The moral of the above mistakes is that it’s never too early to prepare one’s business for sale! That way all owners will be onboard and prepared when the timing is right….or the sixth sense says, “Sell!”
Sellers: Some Questions You Will Be Asked
Sellers are aware that potential acquirers will want to see financials and other important data about their company. However, there are some questions that will, in all likelihood, also be asked by the acquirer or the acquirer’s advisors.
These questions may be part of a disclosure questionnaire that the seller may be asked to answer and sign off on. The questions may, at first, seem off the wall, but they can be just as important as the obvious ones. Here is a sampling of the type of questions that a seller may be asked during the sales process.
- Are you aware of any developments or circumstances the in industry or marketplace that could adversely impact future profitability of the business?
- Are there any revenues or expenses that are not clearly defined in the financial statements?
- Are there any commitments to employees or independent contractors concerning future compensation benefits or any other obligations?
- Is there any equipment used in the business that it does not own?
- Are there any suppliers or customers who have a special relationship with the business or its owner(s)? If yes, what is the nature of the relationship, and how much are the annual purchases or income from these suppliers or customers?
- Are any of the employees or independent contractors related to any of the owners of the business or to one another?
- Have there been any disputes or disagreements with any landlords of any of the premises used by the company?
- Have there been any deaths or any criminal activity on or in the premises within the last three years?
- Does the business have any franchise, distributorship or licensing agreements?
These are just a sampling of the questions that can be asked.
A professional intermediary can help prepare a seller for these or any other questions that a potential acquirer may have during the sales process.
Top Ten Mistakes Made by Sellers
- Neglecting the day-to-day running of their business since it will sell tomorrow.
- Starting off with too high a price since the price can always be reduced.
- Assuming that confidentiality is a given.
- Failing to plan ahead to sell/deciding to sell impulsively.
- Expecting that the buyers will only want to see last year’s P&L.
- Negotiating with only one buyer at a time and letting any other potential buyers wait their turn.
- Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time.
- Not accepting that the structure of the deal is as important as the price.
- Trying to win every point of contention.
- Dragging out the deal and not accepting that time is of the essence.
Tips on Valuation for Sellers
- Show the real earnings without a lot of adjustments and add-backs. Some examples of possible negative add-backs could be:
- Under-funded pension fund commitments
- Under-reserved warranties or guaranties
- No allowance for bad debts
- Under-accrued liabilities for taxes, sales tax, unused vacation and sick leave
- Under insured
- Prepare an exit strategy two to five years in advance by preparing a business plan, preparing accurate pertinent financial reports and implementing a culture of continuous improvement.
- Recognize “on and off” balance sheet items such as customer prepayments, work-in-process billing, contract obligations, lease obligations and legal threats.
- Target acquirers that would perceive the company to be the most valuable.
- Understand that valuation is an important exercise, but usually the value determined is not the purchase price. The business will be bought for whatever the seller will take for it.
- Be prepared to accept lower valuation multiples for lack of management depth, reliance on a few customers and regional versus national distribution.
- Provide a realistic or even a liquidation value for the machinery and equipment. Many acquirers will be using the machinery and equipment as collateral and lenders will usually use a low valuation.
- Be flexible on the real estate as most acquirers would rather lease the real estate component than have it included in the purchase price. Many acquirers would rather invest their money in growing the business.
Should You Be Selling Your Company….Now?
It all depends! There are all sorts of studies, surveys and the like suggesting that with the “baby-boomers” reaching retirement age, the market will be flooded with companies for sale.
The consensus is that with these privately-held company owners nearing retirement age, the time to sell is now. In one survey, 57% of business owners said that their age was the motivating factor for exiting their business. In another one, 75% of owners with revenues between $1 million and $150 million stated that they looked to sell within the next three years.
Reading all of this information, one gets the feeling that over the next few years almost every privately-held business will be on the market.
While there are always going to be those who feel that Armageddon is coming, or that all of these companies are going to be on the market on the day that baby-boomer owners hit 65, there are some compelling reasons to sell your business now – and some reasons that may compel you to hold off.
First, we’ll address the reasons to sell now. Under the Bush administration, the capital gains tax rate was reduced from 29% to 15% – almost cut in half. That is a pretty significant reduction. However, there is the distinct possibility that a new administration in 2009 will see fit to change this, and an increase is a real possibility. The tax issue is an important reason to consider packing it in now.
Another good reason is that it just may be time to “smell the roses,” as they say. After running the business for so many years, “burn-out” is a very valid reason for selling. Many business owners may have, without actually realizing it, let their business slide a bit. You lose a customer or client here and there and don’t make the effort to replace them. Or, you don’t make the effort to check back with the supplier who has promised to give you a better price on an important product or service. It’s too easy to stick with the one you have been dealing with for years, even though you know the price is probably too high.
On the flip side, it is also easy to convince yourself that business is down a bit this year, mostly due to the current economy, likely reducing the value of the company. Maybe waiting until things pick up a bit and values increase would be a good idea. Too many business owners feel this way, but unfortunately no one can predict the future. New competitors may enter your market. Foreign competition may move in. You may not have the energy or that “fire-in-the-belly” you once had, so the business may slide further.
You could also point your finger to the tightening of credit and ask, “How is a buyer going to finance the business?” Despite very low interest rates, borrowing money has become more difficult. People seem to be pulling back a bit, so maybe no one will want to buy the business. Thirty-five percent of business owners, in another survey, said they were going to hold off selling because they felt their business would continue to grow and therefore, hopefully, also increase in value.
There is an old saying that the time to plan your exit strategy is the day you start running the business. Business owners can’t outgrow interest rates, capital gains or aging. The time to sell Is when you are ready to sell. There is truly no right time, but understanding the tax implications now should play a very important role I n this decision if you are considering a sale in the next two or three years. The mere fact that you have read this far may be a sign that now is the time to sell. To learn more about current market trends, what your business might sell for, and what your next step might be, call a professional intermediary.
Exit Strategy: Some Questions to Consider
What will you do when you sell?
This all-important question should be addressed prior to even considering an exit strategy. It is one of the biggest reasons perfectly good sales fall apart prior to closing. Sellers need to answer the questions: What will I do if I am not running my company? And, will I be financially set (including the proceeds from the sale) without the income from the business?
Why an exit strategy now?
The time to consider an exit strategy, as many experts often say, is when the business is started or purchased. A business owner should not wait until some event – such as an illness, a personal issue or burnout – forces a sale. Unfortunately, few business owners follow this advice.
What are your resources?
The time to find good outside advisors to help develop and execute an exit strategy is now – not when you need them. A good accounting business intermediary is also a must. You don’t need to wait until it is time to sell to consult with one. They can help in explaining the process, in evaluating the strength or weakness of the market place, and even in providing a rough estimate of price.
Is there only one exit strategy?
Business owners sometimes think that selling the business is the only exit strategy. There are multiple strategies: an ESOP, a buyout by management, a public stock offering, a merger, etc. An attorney experienced with exit strategies is a good resource.
How much is your company worth?
This is obviously another all-important question. Many things can influence value, both positively and negatively. Having the business valued once a year is not only good business, but can help determine when it is a good time to exit. That time is generally when business is good and profits are increasing.
A final comment
Most company owners spend the bulk of their time running their business. Keeping a company profitable, competitive and growth-oriented can be a full-time job. However, developing a solid exit strategy is just as important. Being forced to sell without an exit strategy, due to some personal crisis, is just not good business and normally results in a significant amount of money lost.