Businesses are Not Launched Overnight, Nor Are They Sold Overnight
September 10, 2010
By Eric Seifert, a Senior Business Consultant with the Michigan Small Business & Technology Development Center. From SBAM’s member-only Focus on Small Business magazine.
A successful business is not created overnight or in a conference room some rainy afternoon. It takes years of strategic planning, long hours and usually the owner’s personal financial investment to launch and grow a new business. The whole process of launching a business could take years. As the economy recovers, and it is recovering, more business owners who spent that time developing and growing their businesses will consider selling their business.
Establish an Exit Plan
Similar to planning the start of a business, a well thought out exit plan will increase the possibility of a positive outcome. Ideally, a seller should begin preparing two to three years prior to putting the company on the market. According to Kevin Hirdes, Managing Partner of NuVescor Group, “With solid planning for a transition in place, the enterprise value of the entity being sold can increase substantially.” It’s much more expensive, disruptive and time-consuming to rush and prepare all the necessary information in a short period of time than it is to consistently compile the necessary records over a period of several years.
Timing Can be Crucial
Many business owners wait until their business is stagnating, or they are exhausted with running the business to decide to sell. They wait until the last minute to try and sell their business-which will not provide the results they want. The optimal time to sell is when a business is doing well. Business valuations are driven by cash flow, so stronger cash flow creates higher value. At times, some business owners have a tendency to disengage from the business prior to selling it. As a result, these businesses many times are sold at compressed values as the business owners passion has decreased for leading the business, and the performance of the business often times follows suit. In sports, the adage is to leave at the top of your game. It is the same with selling your business.
Position the Business for a Sale
Staging or positioning the business for sale can result in a higher price. This can include grooming a level of management and leadership that reduces the reliance of the business on the owner. Unless the buyer is already familiar with the industry, he may need to turn to someone for help running the business after the seller exits. From the buyer’s perspective, it’s better if the current owner is not important to the day-to-day operations and ultimate success of the business. A great management team enhances a firm’s value. Steven Tjapkes, attorney with Clark Hill, Grand Rapids, commented that key employees should be under contract prior to placing the business on the market. “The type of contract is critical – a personal services contract cannot be sold,” according to Tjapkes.
Not only is a succession plan important for the business owner, so too is the management of the customer concentration risks and other key concentrated relationships within the entity. Critical vendor, employee, and customer concentrations are common risks associated with a business. These concentrations should be mitigated well in advance of a sale.
Pricing is Critical
Without professional assistance, many business owners price their businesses based on emotion or hearsay rather than a solid valuation. Unrealistic seller expectations torpedo many transactions. Paul Jackson, a business attorney with Warner Norcross and Judd, believes that sellers lacking a clear understanding of their business’s value can be at the mercy of buyers. Professional valuation experts, accountants and experienced intermediaries [business brokers and merger & acquisition advisors] can provide a reasonable range of value to work with.
Team of Advisors
As previously noted, business owners need a team of advisors to successfully execute the sale of a business. Tax treatment of the transaction can range widely depending on the terms of the deal. A well versed tax accountant is essential to preparing the business to be sold. Thomas Koster, Senior Manager of Rehmann Robson’s Grand Rapids office cites constant changes in tax rates and differing tax treatment of stock sales vs. asset sales as two prime considerations. Assuming a certain transaction value, the net cash return can be calculated and options for further investment defined to minimize tax consequences going forward.
The terms of the Letter of Intent presented by the buyer and the purchase agreement are critical. An attorney experienced in business transactions is very important to ensure the legal documents incorporate all the details. Many business owners seeking to sell their business turn to their traditional attorney for assistance. This can be a mistake unless that attorney has deep experience with transactions.
Sellers should consider hiring an intermediary, either a business broker or merger and acquisition advisor, to represent their interest and facilitate the selling process. An advisor will assist with the valuation, due diligence, and marketing the business sale. “On their own, a business owner attempting to sell the business him or herself is disadvantaged from the start. It is nearly impossible, if not impossible, for a business owner to make the first phone call to a prospective buyer without jeopardizing future profits and revenues of their company. The process of marketing the business confidentially and maintaining confidentiality throughout the transaction process is imperative to a successful high value transaction” according to Hirdes.
Sellers need to keep focused on running their business as if it weren’t on the market. They need to be careful to not to let their business performance decline due to focus on the sale of the business. At the same time it is very important for the seller to consider the effect of the sale on the rest of their life. According to Denny Macha, an organization development consultant in West Michigan, sellers need to plan the transition process inside themselves. “Change creates chaos. Sellers need to learn to let go of what they had, and take on a new vision for themselves.”
Establishing an exit plan, positioning the business for a sale and internally accepting the transition out of the business will allow the seller to react when the perfect buyer walks in
Eric Seifert is a Senior Business Consultant with the Michigan Small Business & Technology Development Center. Mr. Seifert has over 30 years experience financing businesses and currently co-owns a successful health care business.