Selling Your Business Part 1 - Five Steps to Prepare Your Business for a Successful and Profitable Exit
Every couple of weeks I get a concerned call from a business owner that starts like this:
“Business is great, but I’m worried. I know I need an exit plan, but I don’t have one. Where do I start?”
They exhale audibly when I reassure them that:
- asking the question is the first step;
- they are most decidedly not alone; and
- we can figure it out together.
(I usually don’t tell them they are part of the Silver Tsunami because, really, who comes up with these terms anyway??)
What is the Silver Tsunami? During the next 10-15 years between 9 and 12 million closely-held businesses now owned by Baby Boomers will change hands. If they can. Moving from “if” to “when” is what we address here.
To be sure, there are extreme challenges in this kind of climate. Capital remains tight, potential buyers can afford to be choosy, key employees or second generation family members might not be ready to take the mantle, and there may simply not be the right kind of third party buyer. But none of these challenges are insurmountable. You just have to plan and stay focused yet flexible.
Step 1—Get your Business House in Order
Bet you thought I was going to say step one was to decide on your best case exit, didn’t you?
Not quite yet. The most crucial work for your exit happens even before you begin formulating your actual plan, ideally about three to five years before. To maximize the value of your business and ensure any transition consider the following steps:
- Clean up your Financials
- Review your Corporate Records
- Assemble a team of Advisors
- Tie down your Intellectual Property
Most importantly, don’t take your eye off the business ball while you dive into the process. Run your business like someone is watching. Crisp, clean and profitable attracts strong buyers.
Step 2—Decide Your Best Exit and Work Your Creativity
The sad fact is that not everyone is going to have a qualified third party buyer from the outside. This doesn’t mean you should abandon that plan. If you think it is a possibility work towards it, but think about all of your options clearly and rationally. Have a Plan B, a Plan C. and etc. Get granular on the numbers. Think creatively about the structure.
- Is there a key employee who may be able to buy it, one who you trust, who knows the day to day and has drive and passion?
- What about your top management team?
- What about an all-employee stock ownership plan (ESOP)?
- Are you in a position to finance all or part of the purchase?
- Can you afford a long-term payback from an “insider?”
- How do you weigh the risk and benefit of an insider sale?
- Do you want to keep your hand in the business or are you looking to walk away and never look back? What’s the plan if you die unexpectedly or get ill? Is the business prepared for that?
- What if the buyer plans to dismantle the company---are you okay with that?
And don’t forget the psychological impact. This is something you built from scratch. Letting go is really hard. If you don’t think it is you are fooling yourself. Just ask anyone who has done it.
Step 3—Get a valuation
You may think you know the worth of your business but this is not the time to DIY. You need a valuation expert. Really. You do. It doesn’t matter if you are selling to a key employee or an outside party. While the general rule of thumb is that, depending on the industry, your business is worth three to six times cash flow but there are many nuances in closely-held businesses which impact the value. Your accountant is a great resource and can probably provide a good ballpark but a qualified valuation professional is a really solid investment. It will cost somewhere between $5,000-$10,000, but it is worth every penny.
Step 4—To Broker or not to Broker, that is the Question
If you plan to sell your business to a third party whether you need to get professional help depends in large measure on the following: your revenue, your market, your skill set and your stomach for negotiating.
- If your revenue is less than 5 million dollars a year, it is unlikely you will be dealing with an investment banking firm, but you may consider tapping a business broker. The upside of a business broker is that they can help you package and market your business, pre-qualify buyers and assist in due diligence. The downside is the commission for those efforts, usually 10%, which, in my personal experience, doesn’t always equal the value provided.
- If you decide to use a broker, be choosy. Interview three. Ask for recommendations from people who have sold a business through the broker. Look at the materials they have previously produced. And for goodness sakes don’t let them discourage you from running all paperwork (including the listing agreement) by your attorney and accountant.
Step 5—While you wait, increase your profitability and sales
This one doesn’t require an explanation, but it can be hard to do while you are preparing to exit. If you can manage it though, it will pay off.
Step 6—Prequalify your Buyers and be wary of Competitive “lookie loos”
- Sign a non-disclosure before you turn over any information!
- Tell your broker you want to review what they may be posting on websites. You are sharing competitive information--don’t let it walk out the door or show your hand to competitors. Also, when you are dealing with an employee buyer there can be other internal concerns. Once in awhile I see an owner so desperate to get out that he or she overlooks huge red flags in behavior or performance of the person they plan to turn the business over to. Keep your eyes open.
- Finally, be wary of strategic buyers. They may appear to be the best fit, but they could also simply be looking to see your operations from the inside so they can compete against you with your own information. Trust your business instincts.
Up next month:
Deal Flow and what the heck goes into a Letter of Intent (LOI).