When will you prepare to sell your business? Most business owners are hoping to fund their retirement through the sale of their company. This is according to a recent Financial Planners Association survey, which also found most do not have an exit strategy in place to do so. As a business owner, you are the most valuable player on your leadership team, but also the MVP of your destiny.
Selling a business is a very emotional decision, and many are too busy to think about succession or believe selling their company is too far in the future. However, we’ve seen where that can lead to varying results. In one company, the owners were set to retire but found a cost of goods sold problem that setback their schedule another year or two. With another business, there was no clear buy/sell agreement between the partners—one wanted to sell, one didn’t—which left them in a vicious circle at 72. Then, one company watched their favorite 1972 VW micro-bus they used for tradeshows drive off to California as it was included in the asset sale.
Your exit strategy is simple—build a business that attracts buyers. However, you need to start early and often. A company’s health is no different than your own—it requires annual checkups. A regular checkup will help you prepare to sell your business when the time is right. By reviewing your motivation, valuation, and potential, you can get out of the waiting room faster.
Many entrepreneurs have spent a lifetime building a business. Some pass it on to their children, but bankers are fond of telling clients that less than one-third of family businesses survive the transition from first to second generation. A few owners pass their company on to employees in the form of a management buyout or ESOP, but accountants are fond of advising on the tax and payout consequences of those. The outright sale of a company soon becomes a reality for many.
The motivation can be pending retirement, health challenges, or asset diversification. Perhaps your business continuation would benefit from some added investment and energy, and you might want to stay on a few more years. Your motivation will set the pace of the sale, and also how wide the buyer pool is.
Sometimes younger business owners (say millennials) have a clear exit strategy as they’re off to the next venture and want to leave their first one in excellent shape. They want to be entrepreneurs, not managers. Regardless of age, it’s best to perpetually run your business as if it’s going to sell someday because there’s a 100% chance it will—by design or default.
It was once said that valuing a company is like trying to value an aging rock star. Can they still fill up a stadium or just a local venue? Rod Stewart would get a very high valuation as he can still fill a stadium. Al Stewart may not be as lucky.
The rock star looks back and still perceives themselves as a “rock legend.” Likewise, owners are also entitled to feel they have successfully built a legendary company. Some are home-town heroes. However, buyers are looking from the audience and to future ticket sales.
The value of a company is its capacity to generate cash flows, the projected rate of growth, and the uncertainty in between. To reduce doubt, buyers are going to compare you against other companies who have recently sold in your segment. However, it’s not like selling a house where there are many comparisons and much publicity associated with the market. Business owners have to be careful in broadcasting their company is for sale.
Most company sales are tied to a “multiple” or multiplier of EBITDA. In smaller companies, the multiples are based on seller’s discretionary earnings which adds back the owner’s salary, benefits, and certain one-time investments. Multiples reflect risk and behavior in a market. A low-risk business in a high demand market garners a stronger multiple. Higher valuations are also a function of how fast you can enter or grow a market. This is why some social media or app-driven companies get elevated valuations as they can reach millions in months.
Some buyers may also build a myriad of spreadsheets to calculate discounted cash flows. This is estimating the money a buyer will receive from future growth rates and adjusting it for the time value of money. It’s the mathematical estimate of “show me the money” and only a framework. The company should be positioned on its foundation—the historical trends and story. Prepare to sell your business and maximize your return.
To build a good story, we also look at the intrinsic value attributes such as how many referrals your business is getting, customer satisfaction levels, and customer acquisition costs. Each sale is unique. However, when it comes to valuation, we position your company like rock promoter Bill Graham used to say of the Grateful Dead, “They’re not the best at what they do, they’re the only ones that do what they do.”
Selling a company is not like picking from a menu of what you want to do. Everything is negotiable including that VW micro-bus. If the timing is right and the valuation within a marketable range, the next question is what is the potential for a sale?
The buyer pool can include local buyers, competitors, strategic buyers looking for a “bolt-on,” and buyers interested in geographic expansion. There are now boutique private equity investors specializing in key segments like industrial products and services, healthcare, or even SaaS technology. Family offices are a trend of high net-worth investors managing their own investments. Then, there’s always the elusive angel investor.
Each buyer has a specific criteria they’re after and knowing this saves months of time. Selectively and confidentially are a vital concern in determining who gets to see the final marketing memorandum.
The potential for a sale also depends on deal structure. Most small-to-medium size acquisitions are going to be asset sales because that limits the liabilities for the buyer. The seller receives the purchase price and a negotiated amount of excess networking capital (cash and AR less the AP) at the time of closing date.
Cash deals will often get discounted as opposed to acquisitions using earn-outs or notes payable. Many owners are wary of earn-outs while others find them well-worth putting into place. Buyers may request a note payable as part of the sale, but make sure that it is not subordinate to other debt. There’s also SBA loans, seller-financing to consider, and publicly-traded companies might offer stock.
These are all potential appetizers for a deal. In addition, tax implications need to be considered in advance as depreciation recapture, personal goodwill, and business goodwill are all taxed at different rates. If you own land with the business, there are all sorts of creative ways to include it, exclude it or have a continuation of the lease, preferably at fair market value.
Selling a company has a big menu of entrees to consider then put into a great-looking marketing memorandum which will drive letters of intent. However, if you start early and often, you can eat it one bite at a time. We’re here to help, and also ask the final question—where would you want to have your closing dinner? That is non-negotiable.
Prepare to Sell Your Business
Prepare to sell your business now, not later. Contact the team at The Hatteras Group to check on the health of your company with our 10-point checkup to determine your MVP. We are an experienced team of former business owners who have sold their companies, and now help others efficiently do the same. firstname.lastname@example.org or 704-307-4166.