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Mistakes to Avoid
Selling your Company is very different from running your company. When you are running your company you have different goals and priorities. Ideally when you are running your company you are making good long term decisions that bring lasting value to your business which you will be able to realize while you own the business and upon the sale of your business. Getting your business ready for sale is about having your business peak at the right time and being set up to be attractive to buyers. Each business is different. Positions which are an asset to one business can be a liability to another.
Flexibility with regard to your Company Property or Lease
Selling your business is about positioning your business to be attractive to Buyers when you are ready to sell. Entering into a good value long term lease may be an excellent idea if you will be running your business for another decade-however, it may not make sense if you are selling your business and your likely buyer may be consolidating businesses and not want to be hampered with a long term lease. Conversely, if your location is important to your business having a good long term lease with multiple renewals could be extremely important to the business.
A great restaurant with only 2 years remaining on its lease is a ticking time bomb. A technology company that can easily relocate having only a 2 year lease can be an asset. Each business is different. Start looking at your space/facilities from the eyes of a new owner-what is most likely important to them. Often you can position your business with regards to facilities with some flexibility with landlords so you can appeal to a broader buyer base.
Key Employees/Turnover/Confidentiality
If you have a business that is not reliant on certain key employees then transitioning employees will not be a major concern. However if you have employees that have key relationships with your major customers, your employee relationships are part of your equity and are part of your story with an Investor. If you have key employees that can take significant portions of your business out the door with them-address this before it becomes an issue. Take that potential threat and solidify it as an asset of your business.
This can be done in multiple ways-strong employee contracts, non competition agreements, retention bonuses for certain employees, and keeping the sale ultra-confidential. If your business has an earn out agreement, where part of your compensation will come from the results after the sale this can be even more important. The last thing you need is your compensation coming in part from an earn out and your key sales people leave the business.
Conversely, having legacy employees, that are overpaid or non-performing can be negatively impacting your bottom line. If your house needs cleaning it's better to think about that ahead of time. Think about it from the Buyer’s perspective-A buyer would rather know your business got leaner and more profitable in the last year by trimming dead weight rather than thinking they need to come in and clean up your employee issues. Usually what is right for you is right for the new investor. Your financial results, good or bad, get magnified in a sale scenario. An extra $100,000 in employee expense could cost you four or five times that in the sales price.
Timing of the Sale of Your Business
Selling your business at the right time is a multi-variable issue.
For every business, the ideal timing scenario to sell.....
You sell your business while you are on a high-growth, high-profit track.
Why would you sell when things are great? This is often counterintuitive -the best time to sell is when your business is jamming-that brings the big multiple. When you are in a position where you don’t have to sell you get your best price. Unexpected changes can also occur. Think of the last few years-businesses that were doing great all of a sudden have supply chain issues that impact their ability to meet demand-now their sales and profits are down and they are struggling. Did the owner do anything wrong no-but that multiple from 2 years ago is long gone.
Every business is unique though. If your business is in a real multi-year run without many threats you may just keep growing for another year or two and get the premium by waiting to sell. If your business just turned around or just turned profitable, staying the course and having multiple profitable years back to back is worth continuing versus a business that just had a single good year.
Often business owners think about selling when they have experienced tough years back to back. If this is likely to continue and the owner doesn’t have the ability or the energy to change their results-sell it now while you still can. A better plan however is for a business owner who can turn around a few bad quarters by putting in the work and making the changes will be rewarded.
Confidentiality-Competition
​If your business being for sale can affect your current results you must pay extra attention to confidentiality and selectively marketing your business. Competitors will sell against a business that is in transition and competitors will look to steal your key employees. Having the right processes in place (Non-Disclosure Agreements, Vetting potential buyers, Non compete agreements) can minimize this risk.
Financial Records in Order
​Your financial results are your results. Having organized, proper records will instill confidence in potential buyers. If everything in your financial results is a story and needs explaining that will give buyers cause for concern. Accurate financial statements backed up with organized due diligence makes your buyers understand you are in control of your business. Take your medicine-if you have very dated accounts receivable, write off the accounts, it's not the attention you need. Look at your records and results as an outsider-can you as the owner explain your results. Disorganized and incomplete records makes an investor wonder what he's not seeing. Clean, accurate financials softens tough results and makes exceptional results shine.
Qualifying Prospects
Your business advisors need to have a method for qualifying and vetting your potential buyers. The sale of your business is not a food truck lunch, it is a private invitation to an exclusive restaurant.
Qualifying Buyers doesn’t offend real investors-its sends the message that you are professional and that everyone’s time must be respected. Everyone wants to get a look at a business for sale because it's interesting having an inside view someone's business. Making sure that you are only sharing that information with firms and individuals that have the capability to close.
Related to qualifying prospects is keeping any exclusive periods with prospects to a minimum.There is a time and place for a buyer that is truly qualified with the ability to close to have an exclusive review period-this is fleshed out with letters of intent and appropriate due diligence timelines.
Being Organized and having your affairs in order for due diligence helps this process and helps speed the sales process.
Reducing Agreements to Contracts / Negotiation
Getting Paid is the name of the game. Reaching a deal on a Financial figure is just part of the process, making sure your contract reflects and protects your ability to receive all of your consideration is paramount. We cover contracting in much greater detail in other sections but being careful with earn out agreements, contingent liabilities and owner representations are areas that can lead to unpleasant surprises.
Getting paid and avoiding post closing claims and conflict can be achieved through precise drafting. The goal is always to receive your total price up front at closing with no hold backs but being prepared for escrowed funds, holdbacks and earn out agreements is part of the game.
Make sure you have experienced advisors to help you through the negotiation. Selling a business usually only occurs once or twice in a career, so by default most Sellers and Buyers have only gone through this only once or twice. Your business is a business. Selling your business is a different business with different skill sets required.
Your sale negotiation can be white water rafting on class 5 rapids-make sure you’ve got people that know the river. If you're not comfortable, keep looking.
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