How to Sell Your Business Successfully
THE SUCCESS MARGIN
Tuesday, August 5, 2003
My experience is successful entrepreneurs are great at
growing, creating and running their business. They have
to be to survive and prosper.
But entrepreneurs are really bad in handling what is perhaps
the most important financial matter of their entire lives.
Selling their business.
Many businesses are sold for too low a price. Or with little
or no money up front. Or to the wrong buyer.
When you think in depth about the matter, the reasons for the
poor results can become more understandable.
Three big reasons for the many horror stories of entrepreneurs
who sell out are:
1. Entrepreneurs have no experience at selling a business.
They are "babes in the woods."
2. Entrepreneurs are far too emotionally involved with
their enterprise. It's difficult to be objective about
3. There is no really good information of which I'm
aware on selling a business from the entrepreneur's
standpoint (that's the underlying reason for this article).
When I sold one of my early companies, I made nearly
every mistake you can possibly imagine. And I suffered
the consequences. These included too low a price, not
enough cash up front and the wrong, poorly chosen buyers.
But, as with all big mistakes, it became a great learning
experience I was determined not to repeat.
My biggest audience of readers and customers are
entrepreneurs. I know you are the "unsung heroes" of the
world. When you decide to one day sell, you deserve the
very highest check of your life. And lots of other
I'm going to reveal here how to avoid the pitfalls and earn
more money for your years of effort when you decide to
**What about timing?**
When should you plan to sell out?
The very day you start your company!
Too many entrepreneurs have no "bail out" plan in place.
This is a huge mistake in my view.
No business is forever. All have cycles. Successful
businesses have a beginning, a big growth period which
tends eventually to level off or even decline.
Approximately two years before you want to sell out, I
recommend you begin the process.
Why two years?
My experience is to do it right, a completed company sale
usually takes from 16-24 months.
Here are the recommended do's and don'ts I recommend.
1. Get the accounting records in top shape. Retain a
CPA with a good reputation. Ideally you should
have available a certified audit done for the last
2. Find a reputable lawyer who has experience with
company sales, mergers and acquisitions, as well
as the tax aspects involved to represent you in the sale.
3. Interview at least three investment banking firms who
specialize in selling companies of your size to
represent you in the sale. Previous company sales
in your type of business is a plus. Pick the one with
whom you feel most comfortable. Discuss fees. A
typical fee structure is a 5% commission of the first
million; 4% of the second million; 3% of the third
million; 2% of the 4th million and 1% of each million
thereafter. Or the fee structure can also be the reverse,
with the higher % charged on the higher sales price.
There are also many other fee structures, some of which
charge a monthly retainer which can be deducted from
the final commission.
4. Insist that all potential buyers sign confidentiality
agreements before they can examine your books
5. The strategy of your investment bankers should be
to get three or more buyers to "bid" for your company.
This will help drive up the price.
6. Insist on one-third to one-half of the selling price
in cash. Assume the buyer will find a way to default on
the rest of the deal. And consider every dollar you get
beyond the down payment a bonus.
7. Check out the potential buyer(s) thoroughly before you
sell. Talk with other entrepreneurs who may have sold
their companies to the potential acquirer, suppliers, banks
and, whenever you can, former employees.
8. If at all possible, get personal guarantees from the
buyers' key principals.
1. Hide anything which may threaten the future of the business.
These items will undoubtedly be discovered during the buyers'
"due diligence" stage. The result of withholding important
information will be a lost sale or greatly reduced price.
2. Negotiate or even talk with any prospective buyer
yourself during the pre-sale stage. Refer any questions
to your investment bankers. Reason? No matter how good a
communicator you are, you are too close to the situation
to be objective. Plus, it's a much better strategy for you
not to become involved early on.
3. Discuss a possible company sale with employees too
early in the process. This will cause anxiety and be very
disruptive to your business. There will be time closer to
the actual closing of the sale. And many, or even all, of
your key people could possibly be retained by the buyer.
4. Accept an "earn out" for more than 50% to 66 2/3% of
the purchase price.
5. Act on 100% of the advice your lawyers and accountants
provide. Listen and consider what they have to say
within their own field of knowledge. But, remember,
most professionals tend to be poor entrepreneurs
so their business advice should be suspect.
6. Agree to sell to anyone you don't like or respect.
You will undoubtedly have to "live" with the buyer
for at least three to five years.
7. Agree to an employment agreement with the buyer
for more than three years, if at all. Rather than
becoming an employee, I recommend negotiating
for a consulting relationship that is limited to a few
days a month for one to three years.
**Finding the best possible buyer**
First, avoid the two most common mistakes which can have
1. Mistake #1. Selling to employees. While it's
understandable that the seller wants to reward employees
for years of loyal service, selling the business to them
is usually a tragic mistake.
Employees with rare exceptions do not have the necessary
entrepreneurial skills. Otherwise, they'd be running their
own business, not working for you. When you sell to
employees, what usually happens is the business will be run
into the ground. You will be spending hours and hours of
time counseling employees. And you will not get paid.
Plus, you'll wind up with a near bankrupt business back
in your lap!
You have to face this fact. There is no way to completely
protect employees when a company is sold. For example,
the buyers may want to utilize their own employees,
The best you can do for employees is to identify and
recommend your key people to the acquiring company.
And often they will be retained.
2. Mistake #2. Sell to your competitors. This is perhaps the
biggest mistake sellers make. At first, it seems so logical.
But, in reality here is what happens. Competitors don't
need many of the things you have in place. They
already have facilities, equipment, software, real estate,
and, of course, employees. Because of this, they will
discount the price you get for the business accordingly.
You'll wind up with far less money than you would
**Who is the ideal buyer?**
What you want to find ideally is a buyer who:
A. Is "hot" to get into your business for a variety of
their own reasons
B. Know little or nothing about the field of your
C. Has the cash to pay all or most of the price in cash
D. Has a good reputation
E. Desperately needs you during the transition
period of 3-5 years
Seek buyers which include private and public companies as
well as venture capital groups. These will pay the highest
Of course, consistently profitable and growing companies
are the easiest to sell. But it is possible to sell an
unprofitable one as well, providing, of course, you find
the right buyer.
What about price? Of course this varies with the type of
business. However, businesses sold for 5, 10, and even 25
times earnings, or two times sales and more are not
Follow these recommended actions carefully. You will
markedly put the odds of a successful sale in your favor.
If you have a wonderful business, the good news is this.
There are far more buyers than sellers looking for solid
For the biggest payday of your life, build up your business,
ride herd on expenses so that it is very profitable, and sell it
the right way.
The information I've provided you can literally put millions of
extra dollars in your pocket.
Please let me know how the sale of your business has gone
May you live long and prosper.
Copyright 2003 Nicholas Direct, Inc.