Preparing a business for sale, putting together a team of advisers figuring out what kind of buyer and legacy a seller wants and not getting overly emotional as negotiations play out are all healthy pieces of advice for entrepreneurs who are looking to transition from their companies.
One oft-overlooked factor in the sales process is making sure the seller and his or her family have prepared for the transition and know what it’s going to look like.
Richard Brown, chairman and CEO of JNBA Financial Advisors, says he’s seen family members break down in tears over how they think the change will disrupt their well-mapped life routines.
“So, there’s the financial aspect of it, the planning aspect of it, and then, truly, what does it mean for you and your family and how are you going to go on to the next stage,” he says.
JNBA can help walk its clients through the basics of making a sale, but staff also spends time monitoring their emotional state, as well. Jerry Clark, founder and managing officer of SealedBid Marketing, agrees on the importance of monitoring a seller’s state of mind. During a late October panel discussion, he talked of taking the time to plan ahead so the newly freed business owner has a path forward.
“The emotional aspect is huge,” he says. “I just got off the phone with one of our clients this morning and he said ‘I took last week off, my wife and I, to figure out what we’re going to do for the rest of our lives.’”
Selling a company is hard. It’s a long, often tedious process. There are a lot of details to work through. But it’s often the one chance a business owner has to maximize his or her life’s work. Doing it correctly in a way that will provide the greatest value was the topic of the panel at the Minneapolis Club jointly sponsored by Upsize magazine and Rick Brimacomb’s Club Entrepreneur.
Preparing for the sale
One thing an owner can do to make the sales process go more smoothly is spend some time “professionalizing” the business, says Todd Eberhardt, founder and CEO of Dynasty Leadership Consulting. Get the books in order. Map out any systems that allow the company to function well. Show a potential buyer why they should be interested in your business above another.
“If you are in your last three years and you are getting ready for a transition there are absolutely some things you could and should be doing to get the maximum value out of your business,” he says.
Another key is understanding the buyer universe and knowing what a potential sale might look like, Clark says. Are you concerned about continuing your company as it is today? Will it move forward with your existing management team or possibly be merged into another entity? Selling to an individual or group of current employees will create a different future than selling to a strategic acquirer looking to merge your firm into one of its existing business units.
“It may not act as it’s being operated today,” Clark says. “Those are some of the aspects we look at.”
That plays a role in vetting potential prospects. “That’s the whole key, to understand what your client wants,” Clark says. “At the end of the day it’s all about the collaboration with the deal team and getting the transaction done in the best method for what your seller truly wants to finalize at the end of the day.”
Building the right team
It’s likely that a business owner’s expertise does not include selling businesses. So, said owner should spend some time putting together the right team of advisers and engaging them early in the process, panelists say. Some sellers, Eberhardt says, do try to go it alone. “They also will get their wisdom and advice from the same place they watch cat videos,” he quipped.
Eberhardt has been involved in starting five companies. When preparing to sell one, he and his partners told each other they’d be happy if 12 companies showed interest. Instead, they received more than 200 letters of interest.
“Had we not had talented people around us we would have been swamped,” he says. “We probably would have missed out on the one that ended up becoming the best fit for us. So, when I spend my time coaching and getting these people ready, it’s getting them prepared for what’s to come.”
Larry Fox, attorney, shareholder and co-founder of Avisen Legal, says his firm often gets called in at the last minute when companies receive an unsolicited sale offer. That can work, but it’s not ideal. Better, he says, is three years or more ahead of a planned sale.
“My advice would be, if you are thinking of selling your company, to engage counsel as early on in the process as possible,” Fox says. “Start early engaging your advisers. Start early thinking about a sale. Because you can maximize your value by early planning.”
A law firm with M&A experience can get involved in negotiating agreements in tandem with business brokers and investment bankers, preparing letters of intent that start to “put stakes in the ground in terms of deal terms,” and just reading the fine details of term sheets. They also help with due diligence so company officials can continue working in the business in case a deal falls through and, ultimately, negotiate the end document.
“We understand what’s market in terms of a deal,” he says. “We can get you the best deal. I would say engage us early. Help us fix the cracks in your foundation. Get the company looking really good for sale.”
The same goes for a banker, says Ben Hangge, vice president of commercial banking with Highland Bank. A bank’s due diligence process will include poring over three years of historical financials looking for trends in revenues, margins, expenses and profitability. The bank will look at a breakdown in revenue by customer.
“So, as a seller, I would recommend having a good explanation for any negative trends or customer concentrations,” Hangge says.
Bankers will also complete due diligence on individual buyers’ ability to make down payments, help with appraisals if there is real estate involved in a deal and assess records related to what are business expenses versus what are personal.
Typical deals, Hangge adds, are finished through conventional bank financing if the buyer is stronger, or through U.S. Small Business Administration lending, if the buyer wants a minimized down payment or a longer amortization period.
Maximizing a sale
So, what’s the best way to maximize the return in a sale? Especially if the owner wants to step away right away or after a short transition period, that person needs to begin delegating. It’d be a turnoff to a buyer to see too much being handled by someone who’s not going to be around long. This could mean handing off sales to someone else or loosening rules requiring purchases over a certain amount cross your desk. Let your management team handle those situations.
“One of the easiest rules of thumb I look for is, if I have someone else in my business who can do [a task] at 80 percent as good as me, I should be passing that off, so long as they are interested and excited in taking care of that,” Eberhardt says. “Let them grow into that because guaranteed there are bigger problems ahead.”
Clark agrees. Management depth is one of the biggest factors an acquiring company looks for in a target. “Even if it’s a small company you still have to get that owner out of the day to day fray. He or she needs to back off.”
Furthermore, lock up those top employees and managers with viable non-compete or non-solicitation agreements. Not doing so can scuttle a deal at the last minute, Clark adds.
Ultimately, it comes down to getting the company as ready as possible for a sale, Hangge says.
“The biggest thing is trying to decrease as much risk in your business as possible,” he says. “That’s everything from reducing the nonessential expenses you run through the business, reducing your customer and industry concentrations, also ensuring you have a strong management team as well as strong systems in place.”
So, what makes a deal go bad? Often times, sellers have an unrealistic expectation of what their company is worth. It’s understandable, panelists say, because it often represents a life’s work. But for a sale to take place, sellers have to be based in reality. You must, Hangge says, “Balance your personal expectation of what your company is worth versus market realities.”
Failure to do due diligence will reveal blind spots in a deal, says Brown, who adds that a lot of those can be uncovered by bringing the right team into play.
And, finally, keep in mind the role family and emotions will play in doing a deal.
“Sometimes they are super supportive and incredibly helpful and sometimes it makes people take a hard-left turn that nobody saw coming,” Eberhardt says. “Never underestimate the toll the 11th-hour will take on the seller. For all the numbers you are going to discuss, you are still going to lay in bed at night talking to yourself about ‘am I doing the right thing for myself, for my people? Is this the right time?’”
Every deal, he adds, dies three times before being completed. “You have to keep working through it.”
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