Economic revival is giving some company owners hope that it may finally be a good time to sell their business. But without an exit strategy or some advance planning, those owners may be in for some sticker shock.
More than half of America’s business owners don’t have a succession plan in place, according to a PricewaterhouseCoopers survey, and that lack of planning could equate to a selling price far less than anticipated, upending retirement and investment plans. But with a few years of forethought and strategizing, companies can build value and feel confident putting up the for-sale sign.
For a number of emotional and financial reasons, business owners often avoid exit planning, assuming that when they finally decide to sell, all those years invested in the company will make it highly valuable to a host of potential buyers.
“Selling a business, especially for those people who founded the company and built it, is like giving up one of your children for adoption,” says Scott Bushkie, principal at Cornerstone Business Services in Green Bay, Wisc. But the sale of a company is a business transaction like any other, and it requires forethought, planning and timing in order to pull top dollar from strong buyers.
The sales of small firms dropped precipitously in 2008 but have slowly recovered in the past year, giving owners confidence that new opportunities to sell are on the horizon. During the first quarter of 2013, the number of company sales nationwide climbed 56 percent over the same period last year to 1,897, according to bizbuysell.com, an online small-business marketplace. That marked the biggest increase in five years.
“There are a lot of distressed companies on the market where the owners are burnt out, and they’ve lost the will to keep going,” says Andrew Rogerson, a business broker and owner of Rogerson Business Services in Sacramento.
Before the recession, business owners emboldened by rising values resisted selling, holding out for another year or two of price growth. But the opposite happened: two years turned into six years, and business values dropped.
“Companies were thinking, ‘Hey, I’ll sell.’ And they were optimistic about values,” says Fred Eisenhart, managing partner at PricewaterhouseCoopers in Sacramento. “They’ve been holding on ever since, thinking the values are still there.”
Brokers say they also foresee the trickle of business-selling baby boomers will turn into a flood within the next few years.
But business owners looking to sell for personal reasons should take heed. Brokers say the economic climate and business environment are important factors for a lucrative sale, and many business owners often make the mistake of glossing over market trends, instead focusing on their personal situation.
“They focus more on the number of candles on their birthday cake,” says Bushkie, who is also a director of the International Business Brokers Association. “And they think they can control everything.” Deciding to sell because you want to retire in the middle of a recession, for example, might not bode well for the bottom line.
Rogerson relays the pain of one Sacramento business owner who wanted to sell his mail-service business without prior planning and assumed it was worth $1 million after two decades in operation. When Rogerson appraised it, the company was worth $110,000.
Further, company owners commonly assume a business sale will close as quickly as a simple real estate transaction. But even a small business deal can take between nine and 12 months. And the sale isn’t done when it closes if a buyer asks the seller to stay on a few extra months to ease the transition.
Ideally, brokers say, business owners should start preparing for the sale of their business two to three years in advance, at minimum. Long-range planning can offer owners time to build business value and make necessary changes. Depending on the market and company, a business can sell for 20 to 40 percent more if the owner puts in advance work, according to brokers.
“For most business owners, this is their biggest asset, and they should invest the extra time to maximize their investment,” says Curtis Kroeker, group general manager of bizbuysell.com and bizquest.com in San Francisco. Here are some tips that business owners can follow to better prepare for a sale:
STEP AWAY. The further an owner can step away from a company without disrupting the business, the more value it will have.
While it goes against the nature of an entrepreneur, a business shouldn’t revolve around its owner. A buyer will be less eager to purchase a firm if the owner is the sole person who knows how to run the company. Actions as simple as assembling an operations manual and hiring employees who can run the organization can drastically improve a company’s value.
Long-held family businesses must be especially cognizant of succession plans, as many owners often lack an appropriate heir yet haven’t brought in people outside of the family as executives or managers. They will likely have to sell at a significantly reduced rate and stay on board for several months of transition — if they can sell at all.
BEWARE OF THE PRIZE HOG. A firm should not rely on one customer for the bulk of its sales, and any one client should generally not contribute more than 15 percent to a company’s bottom line. In the event a single client is carrying a large portion of the company’s portfolio, there should be an ironclad agreement in place to protect against its loss. If possible, clients should also be diversified across industries to better spread risk.
SAVE EARLY AND OFTEN. A company’s financial statements should be clear and extend back at least three years. They should be easy to understand and show that the company is profitable with stable or growing sales. Statements should also prove that the owner is receiving a salary. Inadequate preparation is one of the biggest mistakes owners make, brokers said.
SHOW ME THE MONEY. A company’s value is centered on its cash flow, not sales. Company owners often focus exclusively on sales and don’t zero in on how they can trim costs. When expenses are taken into consideration, a business is often worth less than the owner anticipated, as was the case with the mail-order company Rogerson appraised.
IT’S IN THE NUMBERS. Company owners like to brag if they sell a lot of custom-made goods, but that’s not very scalable — or smart. Focus on products or services that a company can sell a lot of or can easily duplicate without the owner’s presence. The product or service should be scalable without a drastic increase in expenses, and employees should know how to make or provide the service or product.
A chemical-business owner was doing well selling proprietary chemical blends to other companies, for example. But he wanted to eventually sell and knew he had to have reliable cash flow and rising profits. So, he came up with a proprietary blend that worked for a wide range of customers. When he eventually went to sell, he had 11 bidders.
“A buyer has to see potential,” says Aron Culver, senior vice president at Business Team, a business brokerage in Sacramento. “You have to leave a few nuggets, otherwise you leave some pretty good shoes to fill.”
Go for Broker
Business owners looking to sell a company are well advised not to go the road alone.
“You wouldn’t want to go to court without a lawyer. And you wouldn’t want to sell your business without a broker,” says Fred Eisenhart, managing partner at PricewaterhouseCoopers in Sacramento.
Working with a business broker is similar to forming a short-term partnership where trust is essential, so choose judiciously. The Capital Region is host to a number of reputable, large broker associations where brokers are accredited. As with any partnership, the seller and a broker should interview one another thoroughly.
If possible, start early. Sit down with a broker as soon as you even think you may be interested in selling. Like other advisors, experienced brokers typically quiz owners on their reasons for selling and their plans after the sale, uncovering opportunities and potential problems early in the process. Many owners are so focused on a sale and a potential windfall, they haven’t thought much about their future.
“You can play golf and play with the grandkids now,” said Andrew Rogerson, a business broker in Sacramento. “You need something to move to, something productive. Otherwise, there’s no point going through this difficult process.”
Some business owners need a consultant more than a broker. Too often, brokers say, sellers back out after a broker advises them on how to improve their business because they want another shot at running it. Scott Bushkie, a principal at Wisconsin-based Cornerstone Business Services, went so far as to hire a psychologist to work with new sellers after several sales fell through when an owner got cold feet.
For Bart Landsverk, a majority owner of two newspapers, talking to Bushkie’s psychologist about his reasons for selling initially made him leery. But with four other owners, he understood the reasons behind it. After five months on the market, Landsverk sold the newspapers for $1.6 million.
“The brokers earned their money,” Landsverk says. “I even thought they didn’t charge enough because of all the work they did.”
For Main Street companies, or those worth $2 million or less, brokers typically charge a commission between 10 to 12 percent. For larger companies worth up to $50 million, brokers typically charge fees up front and a smaller commission.
Selling a business is often complicated, and, aside from negotiating a thicket of legal and financial issues, brokers provide something equally important: peace of mind.
“Anybody who thinks they can sell their business (alone) is a fool,” says Landsverk. “They did a lot of handholding. We were nervous we were going to do something to screw things up. How would I even know how to market my company, deal with the legal issues or negotiate?”
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