After I help someone sell or buy a business, I always ask them if they have wisdom they would be willing to share with others who have never been through the process. What better way to get insight into the sales journey than from folks who’ve already travelled the path, right? What follows are the answers to a list of questions I posed to one of those business owners and a little lawyerly perspective as well.
Background: Linda (not her real name) is a double-unit franchise owner of a what we will describe as a personal care business (aesthetic services, massage, hair salon, etc.). She recently sold the two franchises she owned out of state to a private equity backed company.
Prior to selling, how long had you been thinking about selling your business and what did you do to prepare? I had been thinking about selling two of the retail locations for a year and a half. To prepare, I began speaking with the corporate office, other franchise owners, and friends in the industry. I also obtained a business evaluation from a company that specializes in evaluations.
Juliet: Linda had been a long-time franchisee of this particular franchise system, built her locations into power houses, and was operationally excellent but she was tired and had some personal reasons for contemplating a sale. She decided instead of using a business broker, she could find a suitable buyer herself. It certainly helped that the franchise system she belonged to was working with several private equity backed companies who were “rolling up” (buying) these kinds of units—a consolidator of sorts. In other types of businesses though, a broker or investment banker may be the best route to finding a suitable buyer. You need to look at that carefully before deciding to go it alone or with assistance. The valuation is smart as well.
Describe the process generally. How long did it take from start to finish? For me, the process was relatively fast. It took around six months from identifying the buyer and negotiating the sale to closing the deal. I was fortunate because the Buyer was buying a lot of units and had a very rigid closing schedule.
Juliet: Linda’s timeframe is not necessarily typical. Because her Buyer had an aggressive roll up strategy of buying a lot of units all over the country, they had a closing timetable which moved the deal rapidly. They didn’t really care to diligence the operation that much either because they were familiar with the P&L’s generally, the equipment, employment and liability issues and because if they found a problem they would come back after the Seller. Generally, it takes nine months to a year to get a sale (from start to finish) accomplished and due diligence is the most difficult part. Be prepared to willingly share everything the Buyer asks to examine. Don’t be surprised if, after reviewing items, they ask to lower the price either---it happens quite often.
What was the most surprising element of selling your business? Understanding the process and learning of the costs associated with the sale. The three largest fees ended up being the capital gain tax, the tail insurance policy, and the attorney fees.
Juliet: Tax planning in a sale is no joke. You need someone who can work the numbers and understands all the tax ramifications. Often that is not your trusty and long-time accountant. I’m not suggesting kicking your longtime accountant to the curb; only that you supplement her expertise with someone who understands the unique world of taxes in a deal setting. On the fees front, Linda is correct. Attorneys’ fees can add up and it is even worse if you are paying a broker a big commission (say 10%) and she or he wants you to forego legal counsel to save money. This is the biggest transaction of your life. Attorneys like me can work on a budget, but you can’t and shouldn’t go without representation---that is a fool hardy move.
Tail insurance---where do I begin??? This is always, always an issue depending on your industry and what type of coverage you had. Remember, you are indemnifying the Buyer for stuff that happened before they took over (yes, even in a share or member unit sale, unless there is a specific negotiation related to some assumed liabilities). Don’t leave your derriere swinging in the breeze. Get your insurance broker involved early. Make sure you understand exactly what coverage you have and what you will need to keep for some length of time. Make sure the Buyer has insurance too and that you are named on their policy, particularly if there is a carry back. In every sale from the very smallest to the very largest, insurance is an issue often at the end. Tail or closed operations insurance is expensive---but there simply is no other choice.
How do you feel about the process now that it is over? Is there anything you would have done differently? There’s nothing I would have done differently. I was very happy with the transaction and, because I’m in a different period of my life right now than when I went into business, I am relieved to not have the liabilities of owning my own business. I also feel good about the timing and being able to sell the business when it was profitable.
Juliet: This makes me smile but it is not the norm. Linda knew her “why” going in and it wasn’t simply “to get as much money for the business as I can.” Often, business owners haven’t thought about their “why” for selling and so when it comes time to close, they panic and may even tank the sale. After the money has hit the account, others without a firm game plan have a bad case of Seller’s remorse---or, they become depressed and drift. The difference between Linda’s answer and regret is having a firm and honest plan for the day “entrepreneur” is no longer your identity.
Finally, Linda will tell you if you ask her that getting to the closing was a bumpy ride with lots of twists and turns. During those weeks before closing, she had a second full-time job ironing out all the details and supplying information the Buyer requested. She didn’t win every battle and had to compromise on things that she would rather not have, but she was determined, creative with terms when necessary, realistic and practical, and ultimately that got the deal done.