By Stan Bailey, Chairman & Founder
Typically, the success of businesses and their owners is based on sound, long-term strategies of providing products or services needed in the market and serving their clientele effectively.
Owners have also successfully managed pricing, marketing and distribution through effective channels, including e-commerce. As leaders, business owners have “built and steered the ship on a successful voyage” and the result is a solid business reputation with growth trends and profitability at or above industry standards. As an owner, you should be proud of these accomplishments!
However, most business owners have not addressed ownership transition and management succession planning. Others have decided not to trust anyone but themselves to monetize the value of the company before retirement. Of course, as a long-term, successful owner, it’s natural to think “I can sell my business since I know it better than anyone else.” The process of selling a business is critical because it often is the largest component of the business owner’s net worth.
Business success can lead to misconceptions when the time comes to sell the business. Here are 5 common ones:
1. I am the business.– If true, you’ll never sell your business because you haven’t put a team in place for business continuity. A purchaser is not only acquiring the company’s business assets, they’re buying the human assets through the skills and talents of your people. Know where the strengths of your team lie, and develop talent for succession.
2. I can sell my business with one phone call. – In my 27-year M&A career, I’ve never sold a business to the first sale contact. Owners of well-run businesses get lots of inquiries from prospective buyers – some legit, others . . . not so much. Keep a list of these calls and learn about the acquirors. When ready to sell, approach a targeted list of potential buyers to maintain confidentiality.
3. My business will bring top price. – The market will determine the business value, not the owner, based on the quality of the company’s financial performance and growth potential. Revenue and EBITDA size as well as transaction timing have a direct bearing on purchase price multiples. Preparing your business to bring top price includes having favorable earnings trends, clean books and detailed records. That preparation also includes being able to “tell the company’s story” honestly, in a positive light.
4. I can run my own sale process. – Successful business ownership is a full-time job. Selling a business is also a full-time job for 6 to 12 months. If an owner tries to do both, one job will suffer which will lead directly to a lower sale price. Few owners have the experience or skill set developed through numerous transactions to know who pays the highest value and which deal structures provide the most beneficial after-tax value to the owner. Further, few have experience in running a disciplined due diligence process or negotiating purchase, employment, consulting, non-compete, escrow, real estate and other formal agreements with highly skilled and experienced buyers. Recent independent research by academics showed that “private sellers receive significantly higher valuations when they retain M&A advisors.”1 Purchasers may take advantage of inexperienced, self-appointed sellers to accomplish a lower total transaction value. A professional advisory team (i.e. transaction advisor, lawyer, accountant) will make the owner more money versus an owner-run process.
5. I’m headed to the beach upon the sale. – Not going to happen – a purchaser rarely pays top value and then allows the seller to take the full purchase price in cash and leave immediately. As the former owner, you’ll remain contractually involved in the business for at least one year either as an employee or consultant, and perhaps receive some portion of the purchase price as an earn out or performance-based payment. And even though the business is sold, a seller may retain ownership of any real estate of the business acting as the landlord to the purchaser.
Unfortunately, many businesses won’t sell – ever. Reasons vary from lack of positive sales and profitability trends, an inflated asking price, over-involvement of the owner, unfamiliarity with the market, or unconfirmed financial representations.
If you intend to sell your business one day, take necessary steps early to make this a rewarding personal and financial experience.
Stan Bailey is the Founder and Chairman of Ironline Advisors, a lower middle-market M&A advisory firm headquartered in Birmingham, Alabama with offices in Dallas, Texas and Lexington, Kentucky. For the past twenty-seven years, he has completed dozens of M&A transactions for corporations, private equity firms and his own investment portfolio.
Ironline Advisors provides business transition services, including strategic value maximization, generational business transfer, and M&A advisory to lower middle-market, privately-held companies. With years of business and transaction experience, Ironline’ s team of professional advisors has senior management, operations and transaction expertise to assist their clients with transition-related activities. For more information, visit www.Ironlineadvisors.com or contact Ironline at (205) 873-9597.