Things to Ask Yourself When Deciding if You Want to Sell Your Business
Especially when it comes to family-owned or closely-held businesses, the decision to sell involves a complex mix of short- and long-term professional, personal, and financial issues.
Business owners frequently ask themselves:
- The business has never been doing better, why should I sell now?
- How can I risk even starting the process and word getting out to customers and employees?
- I am not ready to retire but would like to get out from under day-to-day operations and take on a more strategic role, is that an option?
- Will anyone pay me how much my business is actually worth?
1. The business has never been doing better, why should I sell now?
Ironically, often the best time to sell is when you don't need to. Companies with cash flow issues, experiencing flat or decreasing revenues, having trouble attracting and retaining key employees, or whose future is otherwise rendered uncertain due to foreseen or unforeseen market conditions are obviously less attractive to buyers. Since these companies are negotiating from positions of relative weakness, they may be forced to accept low offers or unfavorable deal terms since they may not have many other choices and may lack the leverage to walk away from a deal.
Conversely, when a company is able to negotiate from a position of strength – and does not have to sell – the owners have a greater chance of receiving multiple offers and driving the purchase price up. These owners also have the leverage to get favorable outcomes on other important deal terms, such as higher amounts to be paid at closing and lower escrow amounts. Being able to walk from a deal is the best insurance that you will be able to maximize your results.
2. How can I risk even starting the process and word getting out to customers and employees?
Many business owners are contacted by competitors or private equity asking if they would be interested in selling the business. Even if you assume good faith, which may or may not be the case, trusting a third party who can potentially gain from your demise is not a prudent path to take.
The sensible course is to test the waters with a professional and reputable M&A advisory firm that understands the critical need for confidentiality and is experienced enough to manage a sophisticated process. In such a controlled process, information is disclosed on an as-needed basis and in stages, so that interested third parties are vetted, qualified, and under a nondisclosure agreement prior to obtaining the identity of the potential seller and any confidential information. In many instances, the context can be explained as the business owner seeing the potential for capturing additional revenue and market share, and exploring whether it might be appropriate to establish one or more "strategic relationships." In other words, you are not thinking about selling; you are trying to find partners who might have complementary resources.
3. I am not ready to retire but would like to get away from day-to-day operations, is that an option?
While it is possible to sell 100% of a business, it's just as common today to retain some percentage of ownership in the new entity and maintain a key role moving forward for a certain amount of time. In fact, many buyers will want the previous owner to have some "skin in the game" and will want to leverage the expertise and relationships of the buyer for some period of time, which can range from a transition period to full-time employment.
By way of example, a perfectly reasonable scenario is where a business owner sells 80% of his or her company at a valuation of $10 million, meaning an $8 million purchase price. The business owner then takes on a new role after the sale at the new company, such as EVP of Corporate Development, and is responsible for identifying and qualifying other companies for the new company to acquire, or becomes Director of Business Development, and is tasked with maintaining strategic customer relationships and trying to develop new ones. Then, in a few years when there is a subsequent sale of the new company (which is by now much larger due to the additional resources and capital invested), they are able to cash out and get a "second bite of the apple," selling their retained 20% interest for an amount that if all goes according to plan, will be greater than the original $8 million purchase price.
4. Will anyone pay me how much my business is actually worth?
Although it's been said before, it nevertheless remains true that "a business is worth what someone is willing to pay for it."
They keys to maximizing this amount include understanding what factors are critical to potential buyers in your particular industry (such as recurring revenue, lack of customer concentration, barriers to entry, profitability, a loyal and happy customer base, and untapped future market potential), and taking the time to position your company accordingly. In short, advance planning.
An experienced M&A advisor should be able to provide reasonably accurate ranges for what your company might be worth in today's market as a gauge for determining if the time is right to explore a potential sale or strategic relationship, and seeing what someone would be willing to pay. But regardless of whether time is right now to sell, there is no time like the present to get an understanding of those factors that lead to higher valuations.
Even if a confidential sales process is started and an M&A advisor is engaged, the business owner has the final say about if, when, and for how much he or she will sell their business, and the process can be put on hold or stopped at any time. But, after working so hard and long to build the business, it would almost be negligent not to prepare in advance for a sale, before you are under the magnifying glass of one or more potential buyers, and to not make an informed decision.
Gregg Schor is the CEO of Protegrity Advisors, a leading regional M&A advisory firm serving businesses with revenue from $5 million to $100 million across a wide range of industries including technology, medical and healthcare, manufacturing and equipment, construction, media and content, and energy. Headquartered in Ronkonkoma, Protegrity Advisors has relationships with private equity, strategic and other types of buyers and sellers across the United States and internationally. If you are thinking of selling your business, call Protegrity Advisors at (631) 285-3172 or email Gregg at email@example.com.