The Right Way to Sell a Business
by Shel Horowitz
Phil Steckler has some advice before you sell your business: "It's not what you sell it for, it's what you get to keep." In other words, both price and tax consequences can becrucial factors in maximizing the proceeds of a sale of the business to the owner or shareholders.
Steckler, a Certified Business Intermediary who has helped to sell hundreds of businesses in his 30 years in the field, says every business, whether or not the owners plan a sale in the near future, can benefit from a professional business valuation. It's a way of framing your goals for the business, and of assessing what it's worth on the market—and also whether the business can even exist without you. A quick survey of those attending the Family Business Center’s April gathering indicated that for most owners, the value of their business is either their 1st or 2nd most valuable asset. The sale of a business should enable an owner to pursue his or her own interests. Knowing the value of a business helps the owner determine if the sale of the business will enable him or her to afford these pursuits.
Steckler identified another reason to begin early: it's not a fast process. "It takes time to sell." From 1986-2004, the average time to sell a business was over 8 months. "We tell our clients that a typical sales cycle of 6-18 months is realistic. We're closing a transaction this month that we've been working on for three years."
Of course, sellers can take steps to enhance the marketability of their business. "Remember when we used to go out on dates? We generally showered, put on cologne, and dressed ourselves up—we wanted to make a good impression. When you’re ready to sell your business, dress it up—put your best foot forward.” Steckler indicated that there were a number of steps owners should take:
- Enhance profitability. Profitability, however defined, is the single most factor determining value. Owners naturally want to minimize taxes when operating a business. However, as the time to sell approaches, enhancing profits will enable an owner to attract more buyers and command a higher sales price.
- Reduce unnecessary assets. Most businesses have nonproductive assets, such as machinery and equipment, fixtures and old inventory. Selling or liquidating these prior to a sale can provide a lean, clean business to prospective buyers, and enable the seller to realize higher total proceeds.
- Address environmental issues. Deal with any environmental issues ahead of time; "you never want to let them get in the way of a sale once you have momentum."
- Allocate responsibility to qualified personnel. Having others assume key roles reduces the dependence on the owner—and makes the business more attractive to a wider base of buyers.
- Understand tax implications and strategies. As mentioned above, properly structuring a transaction can be as important to the net proceeds as the actual sales price. Sellers should be working closely with a qualified accountant experienced in the sale of businesses.
But selling a business is not all about money. You need to know your preferred exit strategy: how much if any role will you continue to have in the business after the sale, and for how long?
Mike Camerota, the other presenter, stressed the importance of determining the type of acquirer who might pay the most because of strategic interests—and the answer may not be obvious. It may even go against common sense. As Camerota put it, "If you don't know what is the kind of company that has the most opportunity for you, you're going to show your business to an awful lot of people. As careful as we are in exposing the business, if 10 people know it's for sale, someone 's going to come up and say, 'I heard'—and nobody wants that."
Camerota provided two scenarios where identifying the “best” buyer made a huge difference in the sale price. A small home heating oil company with narrow margins and mostly “will-call” customers (customers that call for oil delivery as opposed to those on automatic delivery) will be of little value to a competitor in the same market because he has little or no need for the location, equipment, customer service person, service manager and institutional experience. An individual simply looking for a good business to own and operate requires and will pay for all of those “assets”. So doesn’t it make sense that an individual would probably be a better buyer and offer more for the same business? In fact, the top three offers in that situation were all from individuals, not competitors.
Yet for a Connecticut manufacturing company operating in a 150-year old, three-storey building, the opposite logic held. In that case the best buyer would probably be another company in the same industry—in part because of the expertise necessary to operate such a business. Also, the company had suppliers and customers located throughout the U.S. and even overseas. An acquiring company did not have to be located in Connecticut (with its high labor, energy and insurance costs). Rather the acquirer could be located anywhere in the U.S., and operate in a much more efficient physical plant.
If the acquiring company had excess capacity, it could fold the manufacturing operations of the purchased company into its own operations and eliminate most of the plant, equipment, and management costs. And since the company being sold imported rather than manufactured many of its products, the acquiring company would not even require excess manufacturing capacity to distribute the imported products.
The company being sold had relative small net profits, but revenues in the millions. What if most of the gross profits were to drop directly to the bottom line? Wouldn’t the right acquiring company be willing to pay quite a lot?
The key to finding the right buyer, says Camerota, is locating "the person who looks at your business and sees that the right things are wrong. None of us are a round ball. In every business, ownership and management are good at some things and not good at others. And they like and dislike some things. They may have great products, great employees, no marketing. Or they don't know how to price, or how to control their costs. So the right buyer is the one who can come in and fix the weaknesses" and increase profit. Therefore, it's just as important to identify the weaknesses as the strengths.
As Steckler pointed out, "People don't generally buy businesses because of what your assets are worth. They buy businesses to generate money. Will the suggested price allow a new buyer to pay the debt, pay a reasonable salary, replace aging equipment, get a return on investment? Business owners need to consider this when thinking about pricing their business—any serious buyers will.
“One buyer is no buyer” is a popular saying in the merger and acquisition industry. When it’s time to sell, owners benefit by increasing exposure to a number of qualified buyers. Having a several “suitors” at one time enables the seller and his advisors to control the process and realize the best possible price and terms.
Steckler outlined 13 steps in the selling process:
- Valuation: Get an idea what your business is worth
- Personal Goals—will the sale enable you to realize them?
- Analysis: of the business and of the industry
- Preparing the Marketing Documents
- Exit Planning: How will you be in the transition? Will you continue with the business?
- Buyer Marketing Strategy—who should be looking at your business?
- Negotiating—and you shouldn't need to do very much, if you've done the other things right
- Letter of Intent
- Due Diligence
- Purchase & Sale Agreement
Keep in mind that any suitor has alternatives. While prospective buyers may be looking to acquire, they're not necessarily looking to acquire you. If you make the deal unappetizing, they'll walk. But if you advance the buyer's strategic goals, demonstrate strong and accurate financials, and are reasonable in negotiation, the deal will close.