By Mason Myers, Greybull Stewardship, Business Investment Fund
When selling your business, it pays to learn lessons from others. Most business owners will not get a second chance to do it well, and it is such an important process for your employees, your customers, and your own bank account that you want to maximize your chances of success.
I have been involved in over 30 business purchases – most with between $1 million and $5 million in profit – and have earned scars from broken deals, learned many humbling lessons, and burned the midnight oil doing my best to craft the perfect win-win arrangement. Even now, I learn something new or experience something unpredictable in each transaction.
Here is the best of what I have learned:
1) Put Time on Your Side
Most business endeavors are easier and better when time is your friend. The opposite is also true – it is difficult to optimize the results of a business sale if you compress the time available to work all of the components. This applies to both the time available each week and the time from the start to the finish of the overall process.
It is wise to begin thinking about selling your business well before you want to or need to. Sometimes it takes years to craft the best trends in your business, get proper accounting processes in place, get the management team in place, and find the best investment banker. I recommend that owners anticipate that the sale process could be a half- to full-time job by itself and they are well served by setting up an internal management structure that can keep the business on track during the months of a sale process and getting outside help (see below) to help manage the process.
2) Get Expert Assistance
You will come out ahead, both financially and psychologically, when you hire an adviser to help with the process. The payoff will come on multiple fronts. First, they save you tremendous time in talking with buyers, preparing documents, and providing a buffer to allow your business to stay on track during the sale process. Second, they have experience navigating the sometimes confusing waters of a sale process. Third, they can broaden the net of potential buyers, which is very important to maximizing the highest probability and highest valuation of a sale. Networks like Axial will also help you widen your net. Please see below for more commentary where success is often all about finding the right fit and the right timing.
3) Orderliness is Godliness
Appearances matter in the sale of your business. It is surprising how much the appearance of your records, reports, files and processes can impact how potential buyers view your business. I think this is because every impression is important as buyers are operating with very little information so every little thing leaves an impression. Being organized conveys to buyers that this is a well-managed business. It will save you tremendous time to be orderly and organized when it comes time to produce documents and many other things for the buyer, particularly during due diligence.
4) GAAP Accounting
Make sure you speak the language of business, banks, and investment professionals. For some business owners, selling a business is like entering a foreign land where the primary language is GAAP and EBITDA. To operate effectively in this foreign land, you need to understand the basics of GAAP (Generally Accepted Accounting Principles). I have had business owners tell me that “cash is all that matters,” or that “I have my own way of accounting that works for us.” That is fine, but investors will not understand your particular language very well. Therefore, you need to make sure that your financial statements are presented using GAAP and it is often worth it to hire a firm to do a review, an audit, or a Quality of Earnings analysis to get your company prepared and ready.
The number one pitfall can be situations where the business receives cash before delivering the product or service. To business owners, they often consider that cash to be revenue. In GAAP, that is not revenue until the product or service is delivered, and this can make the company’s revenue appear dramatically different. There is nothing that hurts your credibility more than financial results that are significantly different when prepared via GAAP – it just makes you look unprofessional and naive.
5) Getting Key Contracts and Leases Assigned to the Buyer
A wise investment banker once told me, “no one is more arrogant than a landlord in a tight market.” That is true, and unbelievably frustrating when a landlord is holding up the sale of your company. Most stopgaps occur because the landlord will not assign the lease to the new owner or he is using this point of leverage to extract some economic concessions from you or the buyer. I recommend that you begin to review your key contracts and leases years in advance of the sale and attempt to get them “assignable” at your option to avoid being “held up” by a landlord or key customer. This happens all the time. Right now, I have one acquisition being held up by landlords trying to extract value for assigning the lease to the new buyer. And, I have another acquisition that has been held up for three months while a few large Fortune 500 companies are reviewing some key customer contract assignments. It is not good to have your big sale held up by these factors.
6) Monogamy Happens at Different Points for the Buyer and the Seller
In the balance of power, the seller is usually most attractive during the early part of the process, since there are multiple buyers considering just one purchase. However, once the seller selects a buyer and signs a Letter of Intent, the seller becomes monogamous and loses some of that advantage. It is important for sellers to understand that there is still much that can distract or dissuade the buyer from that point forward. The due diligence better check out. The buyer could easily get distracted with other deals, or other companies in their portfolio, or their cousin Vinny who loses the family fortune. The seller is wise to keep wooing the buyer all the way until the closing.
To ensure a successful close, business owners should keep the underlying business performing (frankly, it is really good if the business results keep getting better during the sale process), keep impressing the buyer with various elements of the business, and understand that the buyer is not married to the deal until the check clears the bank. At some point, sellers need to transition from adversary to partner with the buyer, and they also need to keep reinforcing the attractiveness of the business until the deal is done.
7) A Deal is All About Fit and Timing
Along with everything else, selling a business is a numbers game. You need to find a way to maximize your chances that you will find several buyers for whom your business is a great fit and the timing is perfect. For many buyers who may be great for your business, it may be bad timing as they are focused on raising money for their fund, or one of their portfolio companies just became distressed, or the partners are fighting. There are so many things behind the scenes that affect how buyers behave that you will never know what is truly happening in their minds. The best strategy is to cast a wide net, determine who is interested, and do not waste time with any other buyers (even when you think to yourself, “they would be perfect!”).
8) Everyone Freaks Out Sometime During the Process
In nearly every purchase and sale I have seen, there has been a moment when the business owner has freaked out. This is quite normal and usually a good thing (better to have seller’s remorse before the deal happens) as it allows everyone to step back out of the details and make sure the deal is really a good thing for all involved. It is such a grueling and emotionally charged process for many owners that there is quite often a moment when they question the transaction.
When you do freak out, please don’t call the buyer names. Just this week, I had a seller call me all the names in the book because they misunderstood something only to realize it was their error. It is no one person’s fault that the process is frustrating and time-consuming. Most everyone is trying their very best to do the right thing.
9) Control the Lawyers
One business owner called the process the “tyranny of the experts”. When you have not sold many businesses, it often feels safe to rely heavily on lawyers, bankers, accountants, and others from the expert universe. This is important to a point. It is also important to not let them drive the process too much. You are the decision-maker. You have good business judgment. If you have questions, ask them. Ultimately, however, you will need to make the business decisions about how to do the deal (is the lawyer trying to impress you or helping you get a deal?). There always comes a moment where everyone must tell his or her attorneys to back down and get the deal done.
Mason Myers is the General Partner and an investor at Greybull Stewardship, an investment partnership of business owners investing in exceptional businesses with $1 to $3 million in operating profit. He can be contacted at http://masonmyers.com/.