I have often thought that owners would prefer someone to “Buy” their Business rather than them trying to “Sell” the Business. There is a big difference in the process. Putting the business up for sale is a “Big” decision and often Business owners find barriers to delay or refuse to take the step. These include…
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“The business isn’t worth enough to meet my financial needs”.
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“The employees (or customers) will leave when they discover I’m trying to sell”.
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“I will be required to work years for a new owner.”
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“The sale process will take too long and cost too much, I don’t want to hire an “expensive Investment Banker”
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“Given the tax bite on sale proceeds, it makes more sense to stay, enjoy the cash flow and get paid over time.”
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“What will I do after I sell and leave the business? This business is my life!”
However, waiting for the “Offer I can’t refuse” may be futile...it may never come. And when potential buyers knock on the door…and they do, you may not be ready. Responding to an unsolicited offer has its own drawbacks.
In order to truly be in a position to make a logical an informed decision the Business Owner must try and slay some of these “Dragons” mention above. You might be pleasantly surprised how “mythical these objections are.
The Business Isn’t Worth Enough To Meet My Financial Needs
You can’t know whether your business is “worth enough” unless you know what it is worth, and what value is needed in order to meet your financial needs. That’s why obtaining a valuation range for your company based upon current market conditions can be very important. Use a transaction advisor, preferably an investment banker (for companies with a likely value of more than $5 million), business broker or other transaction intermediary (for smaller businesses) familiar with what your business can fetch in the M&A marketplace. It is important to not simply depend on the historical valuation performed by your accountant or the “rule of thumb” used in your industry. Both “rules of thumb” and traditional valuation approaches tend to rely on what has happened, not on what businesses — businesses just like yours — are selling for in today’s market, and tend to overlook the importance of current deal activity levels.
To illustrate this point, let’s look at Sam Reed, a hypothetical business owner who was thinking about selling his business a number of years ago — near the last peak in the M&A cycle.
When Sam Reed started thinking about selling his business, he asked his CPA for an estimate of value. After some investigation of historical valuation multiples, the CPA ventured an estimate of $14 million. The owner needed significantly more than that just to pay off business debt.
Although inclined to give up the idea of selling, at least temporarily, Sam asked his attorney what he thought his business was worth. The attorney’s response was, “I have no idea. You need to work with someone who knows what your type of business is selling for in today’s marketplace.”
At that point, Sam hired an investment banking firm to answer the question of what his business was worth in the current market. The firm returned with a baseline (or minimum value) sale price estimate of almost $30 million for Sam’s business. With that information, Sam chose to proceed with a sale and eventually sold for more than $40 million.
The point of this story is that to determine the value of your business, in today’s marketplace, ask an experienced professional who makes a living working in that market.
Another way to determine the value of your company is to hire a valuation specialist, even if you are a few years (or more) away from selling. Doing so is also helpful if you plan to sell or gift part of your business before the sale in an effort to meet your Exit Objectives (such as transferring wealth to children, charity or employee/s).
The Employees (Or Customers) Will Leave When They Discover I’m Trying To Sell
While this is a legitimate concern, when properly handled, no one should find out about the sale process until you inform them. Typically, a potential buyer does not even set foot in your business until you have made a tentative decision to sell the business to that buyer. When conducted by experienced professionals, the sale of a business is highly confidential, and the likelihood of anyone discovering you are selling your business before you inform the public is minimal.
I Will Be Required To Work Years for a New Owner
If one of your Exit Objectives is to leave the business as soon as possible, it is important to make that objective known to your Exit Planning Professional and it will be a prerequisite of any sale. That objective will determine which type of buyer you should seek. There are categories of buyers who typically do not require the former owner to remain with the company beyond a short transition time period — usually no more than a few months — provided your management team is strong.
The Sale Process Will Take Too Long and Cost Too Much
Cost, of course, is a matter of perspective. But the only way for you to make the determination whether the sale process is too expensive or not is to discuss costs and expenses with your advisors before you hire them. It usually takes from six to eighteen months to sell your business. The more you know, the better prepared your company can be for sale. Better preparation on your part can mean less time and expense on the part of your advisors. For most business with a value exceeding $ 4mm the Investment Banker fees may be only 2 or 3%. The majority of folks use a Broker to sell their house and gladly pay 6%.
Given The Tax Bite On Sale Proceeds, It Makes More Sense To Stay, Enjoy The Cash Flow And Get Paid Over Time
With proper tax planning, Uncle Sam’s cut of the sale proceeds can be minimized so that you are in a better position to meet your financial and personal objectives upon your exit from your business. But planning — and implementation — can take years to be fully effective. Delays in beginning to plan works to reduce time available and can increase taxes.
What Will I Do After I Sell And Leave The Business? This Business Is My Life!
For many business owners, the old “fire in the belly” is gone, but there is nothing to replace it. So many hang on to their businesses, willing to accept what they know because they fear that the unknown may be even worse. Yet, many owners don’t know what they will do when they exit. In the words of a real-life business owner who faced this dilemma; however, exiting a business can end up uncovering new and exciting opportunities for owners to pursue after the sale.
Final Thoughts
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