No one keeps a business forever. At some point, you’ll either want to sell your business or have to retire. When you’re ready to sell, it is important to streamline the process, minimize the stress, and also receive top dollar. In a recent Forbes magazine article, “How to Find a Buyer for Your Business,”serial entrepreneur Alejandro Cremades explores the most important steps business owners should take when looking to sell.
Like so many things in life, finding a buyer for your business is about preparation. Cremades, author of The Art of Startup Fundraising, says you should start thinking about selling your business on the day you found your company. Creating a business but having no exit strategy is simply not a good idea, and it’s certainly not a safe strategy either. Instead you should “build and plan to be acquired.”
For Cremades, it is vital to decide in the beginning if your preferred exit strategy is to be acquired. If you know from the beginning that you wish to be acquired, then you should build your business accordingly from day one. That means it’s essential to understand your market and know what prospective buyers would be looking for.
According to the the Kauffman Fellows Leadership Development Program, acquirers buy businesses for a range of reasons including:
- Driving their own growth
- Expanding their market
- Accelerating time to market
- Consolidating the market
- Reinventing their own business
- Responding to disruption
Startups should be prepared to answer these questions:
- How profitable is the company
- Size of total addressable market
- What are the top line revenues
- How much are gross profit margins
- Are customers retail consumers, SMB clients or enterprise level
- Customer churn rates
- Customer satisfaction ratings
- Value of contracts
Additionally, it is critical to make connections. “Strategic acquisitions are about who you know, and who knows you,” says Cremades. “Start making those connections early.” Buyers are not always who one expects in the beginning of the process. Keeping this fact in mind, it is important to stay open and always look to build solid relationships and keep those relationships up to date regarding your status. Getting your company acquired won’t happen overnight. Instead, it is a process that can take years. Therefore, networking years in advance is a must.
Like many seasoned business professionals, Cremades realizes how important it is to work with a business broker. Cremades says brokers “can help make introductions, hype up the opportunity, demonstrate the value, create a bidding war, manage the process and hopefully get you more for your company. That’s their job. The more they get you, the more they get paid.”
If you have failed to network properly over the years, then a broker is an amazingly valuable ally. They are about more than offering sage advice, as business brokers can also make potentially invaluable introductions and help you navigate every stage of the acquisition process.
“A talented team alone may warrant a bigger company buying your startup,” Cremades says. “So, hire the best. Who you put on your board can make it very easy (or more challenging) to get your company acquired as well. What experience do they have in M&A transactions? Who do they know that will also invest or may want to buy you out?”
By C. David Chambless, president of Abraxas Business Services
Accountants routinely assist business owners to help accomplish the goal of minimizing taxes. But, to truly understand the value of the business and accurately project future cash flow, it is important to look beyond the tax returns to realize how the money is being spent.
Selling a business is a complex process that boils down to this: Finding the right buyer. In a recent Forbes article, “Ready to Sell Your Business? Follow These 3 Tips to Find the Best Buyer,” author Serenity Gibbons, a former assistant editor of the Wall Street Journal, outlines the multifaceted process of selling a business.
Gibbons cautions small business owner to thoughtfully consider when, how, and to whom you sell your stock. “Create a for-sale plan that sets up the business for long-term success,” she recommends. To sell your business the right way, have a coherent and well thought out exit strategy in place. In fact, many experts feel that you should have an exit strategy in place even when you first open your business.
If you’re like most small businesses, a large percentage of your wealth is tied up in your business. Unfortunately, studies indicate that only estimated 20% to 30% of businesses on the market actually find buyers. This important fact means that business owners are vulnerable if they can’t sell. It is vital for business owners to make their businesses as attractive as possible to buyers for when the time comes to sell.
To make a business attractive for sale at the best price, “the owner’s role has to be relatively easy to transfer, ” says Michael Lefkowitz, author of the exit planning book “Where’s the Exit.” “Before you make your exit, you have to take some time to step away from daily operations, polish the appeal of your brand, update your books, and build up the capability of your subordinates,” Lefkowitz says. In short, you have to become replaceable.
Gibbons notes that “not every buyer with cash in hand is the right buyer for your company.” Three key variables must be addressed when looking to find the right buyer: consider your successor, explore your broker options and find a pre-qualified buyer.
In the end, working with a business broker is the fastest and easiest way to check off all three boxes. An experienced professional knows the importance of working exclusively with serious, pre-qualified buyers. Since a good business broker only works with serious buyers, that means business brokers can greatly expedite the process of selling your business.
“Assuming you choose wisely, this person will know how to craft a unique and compelling narrative about your business to inspire people to pony up the necessary dough—all the while helping you navigate the emotional ups and downs that accompany the selling process,” says James Moran, founder and managing partner of ValueStreet Equity Partners, a San Diego-based small business investment firm.
Those looking to get their business sold and reduce an array of potential headaches along the way, will find that there is no replacement for a good business broker.
The 65-year old owner of a multi-location retail operation doing $30 million in annual sales decided to retire. He interviewed a highly recommended intermediary and was impressed. However, he had a nephew who had just received his MBA and who told his uncle that he could handle the sale and save him some money. He would do it for half of what the intermediary said his fee would be – so the uncle decided to use his nephew. Now, his nephew was a nice young man, educated at one of the top business schools, but he had never been involved in a middle market deal. He had read a lot of case studies and was confident that he could “do the deal.”
Inexperience # 1 – The owner and the nephew agreed not to bring the CFO into the picture, nor execute a “stay” agreement. The nephew felt he could handle the financial details. Neither one of them realized that a potential purchaser would expect to meet with the CFO when it came to the finances of the business, and certainly would expect the CFO to be involved in the due diligence process.
Inexperience # 2 – It never occurred to the owner or his nephew that revealing just the name of the company to prospective buyers would send competitors and only mildly interested prospects to the various locations. There was no mention of Confidentiality Agreements. Since the owner was not in a big hurry, there were no time limits set for offers or even term sheets. It would only be a matter of time before the word that the business was on the market would be out.
Inexperience # 3 – The owner wanted to spend some time with each prospective purchaser. Confidentiality didn’t seem to be an issue. There was no screening process, no interview by the nephew.
Inexperience # 4 – The nephew prepared what was supposed to be an Offering Memorandum. He threw some financials together that had not been audited, which included a missing $500,000 that the owner took and forgot to inform his nephew about. This obviously impacted the numbers. There were no projections, no ratios, etc. This lack of information would most likely result in lower offers or bids or just plain lack of buyer interest. In addition, the mention of a pending lawsuit that could influence the sale was hidden in the Memorandum.
Inexperience # 5 – The owner and nephew both decided that their company attorney could handle the details of a sale if it ever got that far. Unfortunately, although competent, the attorney had never been involved in a business sale transaction, especially one in the $15 million range.
Results — The seller was placing almost his entire net worth in the hands of his nephew and an attorney who had no experience in putting transactions together. The owner decided to call most of the shots without any advice from an experienced deal-maker. Any one of these “inexperiences” could not only “blow” a sale, but also create the possibility of a leak. The discovery that the company was for sale could be catastrophic, whether discovered by the competition, an employee, a major customer or a supplier .
The facts in the above story are true!
The moral of the story – Nephews are wonderful, but inexperience is fraught with danger. When considering the sale of a major asset, it is foolhardy not to employ experienced, knowledgeable professionals. A professional intermediary is a necessity, as is an experienced transaction attorney.
If you’ve never bought or sold a business before, then the factors that drive and influence business valuations likely seem a bit murky. In a recent Divestopedia article from Kevin Ramsier entitled, “A Closer Look at What Drives and Influences Business Valuations,” Ramsier takes a closer look at this important topic.
Business brokers and M&A advisors play a key role in helping business owners understand why their business receives the valuation that it does. No doubt, the final assessed value is based on a wide array of variables. But with some effort, clarity is possible.
In his article, Ramsier points out that “value means different things to different buyers” and that the “perceived value depends on the circumstances, interpretation and the role that is played in a transition.” It is important to remember that no two businesses are alike. For that reason, what goes into a given valuation will vary, often greatly.
Looking to EBITDA
Ramier points to several metrics including return on assets, return on equity and return on investment. Another important valuable for companies with positive cash flow is a multiple of EBITDA, which stands for “earnings before interest, taxes, depreciation and amortization.” EBITDA is widely used in determining value. On the flip side of the coin, if the company in question has a negative cash flow, then the liquidation value of the business will play a large role in determining its value.
Primary Drivers to Consider
Ramsier provides a guideline of Primary Drivers of Valuation, Secondary Drivers of Valuation and Other Potential Drivers of Valuation. In total there are 25 different variables listed, which underscores the overall potential complexity of accurately determining valuation.
In the Primary Drivers of Valuation list, Ramsier includes everything from the size of revenue and revenue stability to historical and projected EBITDA as well as potential growth and margin percentages. Other variables, ones that could easily be overlooked, such as the local talent pool and people training are also listed as variables that should be considered.
Support for the Business Owner
The bottom line is that determining valuation is not a one-dimensional affair, but is instead a dynamic and complex process. One of the single best moves any business owner can make is to reach out to an experienced business broker. Since business brokers are experts in determining valuation, owners working with brokers will know what to expect when the time comes to sell.