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 your “baby.”
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 benefits too.
I’m going to reveal here how to avoid the pitfalls and earn more money for your years of effort when you decide to cash out.
**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 three years.
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 and records.
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 disastrous consequences.
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, not yours.
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 otherwise.
**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 business
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 price.
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 uncommon.
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 businesses.
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 for you.
May you live long and prosper.