There comes a time when you, as a business owner, thinks of selling your business. Whether it’s because you want a liquidity event to move onto another opportunity, you need a break or maybe retirement.
I’m mainly talking about the brick and mortar style of business before the age of the sophisticated liquidity event-minded startups. The accountants nearing retirement with huge client lists, the owner who after 10 years of running his business just wants a change or the guy reaching retirement with no real succession plan in place.
I had an old client come to me last month, a day before Christmas, who wanted me to package his company for sale. He’s a funny guy who has been running his business like a cottage industry for years who by his own admission could care less for customer service because he ‘hates people’. So, I wasn’t surprised when he came to me but I was surprised when he told he had been actively solicited to sell.
It was a simple process to complete the sale since the new owner had her own vision, loved the product line and knew my client by reputation. She knew what she wanted, what to expect (bad financials) but was willing to do the deal anyway. Most sales are not so clean and easy.
There are essentially three avenues to sell your business: employee buyout, a broker or sell it yourself. Let’s take a look at each of them.
Selling you company to a dedicated long-term employee(s) may sound like a great idea but it has its drawbacks. I had a client who actually had his management team buy his company for exactly what he wanted. It was a dream scenario but they don’t always work like that every time. My client believed the team would follow his vision because it was important for him to have a legacy and since they were senior executives he had worked with for years he believed in their abilities.
On the other hand, I worked on a case where one manager waned to buy an industrial plant from the owner. He wasn’t an exceptional part of the management team and didn’t have a lot of experience. The main problem was that he didn’t have the money to purchase the company at the asking price so the owner needed to finance him. That doesn’t work if the owner has retirement plans for that money – like a new catamaran! The other problem was that with the employee not being the crack administrator the owner needed to ‘stay on’ for at least 6 months for the new owner to get up to speed. Obviously, this buyout could work if everyone had the same motivation and experience was not an issue.
Don’t have a clue what your company is worth or how to get the most for it you should consider a broker to do it for you. A Vancouver firm, Aqua Mergers + Acquisitions, is a boutique M&A advisory firm specializing in early-stage high-tech and life-science companies with disruptive IP for emerging and high-growth markets.
Companies like Aqua will analyze the company a well as the industry and may even have qualified buyers in their portfolio. A broker will look for a buyer who wants a presence in the market they want, access to a company’s customers or any IP (Intellectual Property) the company may own.
As they say, if you want the deal done right get a professional to handle the details so you can get the most for your sweat and tears. Brokers like Aqua are worth their weight in gold especially when dealing with a high tech company looking for a liquidity event.
Sale by Owner
Yikes, now there’s a minefield! The guy I worked with over Christmas was overwhelmed when faced with an offer for his business. In the space of days he needed a business plan, or the very least a marketing plan, for the new owner. He needed to transfer accounts and agreements, create a purchase and sale agreement and even work out the IP transfers.
He had terrible accounting practices so needed an accountant to make the books look presentable and he needed to create a series of procedures manuals since this was a manufacturing operation. He needed to understand the value of his company’s ‘goodwill’ usually determined by a factor of 3-5 times the EBITDA (earnings before interest, taxes, depreciation, and amortization) minus the value of the assets.
He needed to know what to do with work in progress and what parts of the business he wanted to keep. He ended up keeping a small division that the purchaser had no interest in anyway.
Since there might be a large down payment and ongoing payments he needed to do some due diligence on the purchaser so he wouldn’t be left with nothing if they defaulted. He also had to make sure that the purchaser was a suitable owner just for an ethical consideration.
When he had to determine the value of the company he had little; some tooling, an IP but much of it was in a small inventory and unfinished product. He knew what goodwill was but had no idea to calculate it or convert it to a hard figure. He also had to make sure that the purchaser would get value for his goodwill. According to Axel Christiansen, Business Development Bank of Canada, “Goodwill is valuable so long as it does not walk out the door with the owner.”
To be able to get the most from selling your business it’s important to avoid making mistakes:
- Plan Your Sale: Dot the I’s and cross the t’s before you show your company to anyone who might be part of the sale including brokers and buyers. This could seriously hamper negotiations if you weren’t ready to discuss issues.
- Determine a Fair Market Price: What’s the condition of your industry? Is there a trend in pricing or a move to a new direction? What is a fair price considering your sales, assets IP’s, etc.?
- Can you substantiate your Price? You may think your hard work is worth more than others will value it. Be realistic and open to a third party assessment to either validate your estimate or improve your chances of selling. You can be assured the buyer will have a number in mind.
- Due Diligence: If there are terms involved make sure the buyer can live up them. If you value the integrity of the business and your customer’s welfare see if they are suitable.
- Sell for the Right Reasons: Don’t sell if you are desperate to get out. There may be other options and purchasers out there.
The bottom line is that, for whatever reason you are selling you want to optimize the amount you can get for it, do it the right way so everyone benefits and you want to keep your integrity intact. And lastly, ask for help!
Check out Gary’s latest book, “Social Media Rockstar – Social Media Marketing for Entrepreneurs and Business” on Amazon