( With Real-Life Examples)
Would you prefer to:
- “retire” with half of what your business is worth and a 3-year employment agreement, or
- walk away with $7,500,000 in cash and with no further responsibilities?
The answer is obvious, yet the solution has layers of complexity.
You can go it alone, but, in my experience, the difference is getting help from a GOOD business broker! Using my own examples, here are the hard-learned lessons I have watched sellers come to grips with as they transition OUT of their successful enterprise.
The vast majority of owners who spend their time and energy building their own businesses hope someday to either pass them on as a legacy to their families or sell them to someone able to continue growing their dreams. Unfortunately, in most cases, these sales will not materialize.
Statistical data supports that only about 15% of businesses listed for sale, at any one time, will actually sell at the price and terms as marketed, leaving owners with a trifecta of less satisfactory choices:
- continue to operate the business indefinitely,
- lower the price and/or terms, or
- shut down entirely.
Entrepreneurs are creative by nature. Creative people prefer to be paid for their work.
The problem is, the skill sets necessary to build and maintain a business are not always the ones needed to sell a business, and owners are often not objective enough to see the steps that need to be taken for a successful sale to go through.
For this they need a business broker, someone who is paid to take a good hard look at the business and make the changes necessary for the sale. At some point, owners need to step back from working in their business and work on it.
The alternatives are not desirable:
- lower price,
- longer post-sale commitment, and
- larger seller financing.
As any experienced business broker will tell you, there are a number of reasons businesses fail to sell. Personally, I’ve seen businesses stubbornly fail to sell for many reasons, but, in the last 10 years, my experience has taught me that these 3 reasons are the most common:
Company: A machine shop
Desired sale price: $475,000 (reasonable…at first)
Staff: The owner, one employee, and the owner’s wife as admin
Problem: The owner did all quoting and customer servicing
I. Dependency on the Owner
Many business owners are intrinsically tied to their businesses. They created them, they run them, and they have established the critical connections to keep them running. The problem is, without these owners, the businesses cannot operate well or at all, and any savvy buyer will understand that when he/she begins to ask questions in preliminary due diligence. A company is much easier to sell when it is not dependent on one person, and specifically the person who will be leaving the business upon its sale.
Recently, I sold a small machine shop. The owner was hoping to achieve a sale price of $475,000, which at first seemed reasonable. There was one employee besides and owner, and the owner’s wife took care of administrative tasks. The main issue was that the owner maintained all the customer relationships and spent 40+ hours per week working on projects, quoting and working with customers.
When we put the business on the market there was a good deal of initial interest. Unfortunately, once the buyers came to understand that the owner was the business, the buyer interest dwindled.
After all, if all the customers rely on the owner, call his cell phone with questions about products, services, billing, etc., what happens when he’s no longer there? It was simply too risky for most buyers. At the end of the day, the business sold for $210,000 and a job. The job was requisite because the owner was necessary in order to transition the goodwill of the customer relationships.
How do we prevent this from happening to you?
Solution 1: Implement a cross-training program to increase the value of employees, or
Solution 2: Hire a general manager and begin training to assume the owner’s role
Downside: Payroll increase
Upside 1: Business value increases more than payroll
Upside 2: Reduce transition time (get you out of there faster)
One of the best solutions to this dilemma is to implement a cross training program and start adding value to the existing employee(s) or possibly even consider bringing on a general manager and train him/her to start the process of performing many of the owner’s responsibilities. Yes, this will increase the payroll expense, but, in many scenarios, the increase in enterprise value of the business far outweigh the increased payroll. Many times, implementing this strategy will also drastically decrease the amount of transition time the seller will need to stay on post-closing.
This, and many other strategies, are why it is critical that you start working with a good business broker long before you are ready to sell.
Company: A fiberglass manufacturing business
Desired sale price: $1,250,000
Staff: One owner, 2 managers, 8 production team members
Problem: It was unlikely a buyer would have experience in this niche
II. Inconsistent Revenue Stream
This is also related to owner dependency. Buyers expect that the company will continue making revenue into the future. Are the contracts the business has with its customers in force? How is revenue made – is it point of sale only or are there future contacts scheduled for service or upgrading? The business needs to both be making money and to continue to make money to be attractive to buyers.
In 2016, I sold a fiberglass manufacturing business that built and sold products to a niche set of customers. The owner had contracts in place and a customer base that was always interested in the next model. The designers would submit prototypes; the company would take care of marketing, manufacturing, fulfillment and customer support.
What is so very interesting about the sale of this business is that the buyer had no prior experience in the manufacturing world, had never worked in a manufacturing business and was an “outsider” in this niche industry. Yet he was still very successful post-sale! This is because the previous owner had spent time building a systems-based company, writing down instructions, and training a manager so that he could spend a good portion of this time working on personal projects. Revenue was growing and predictable which made all the difference in the world.
It is important to note that during the marketing of this business we received three letters of intent and negotiated an even higher than asking price due to the profitability and marketability of the company.
How do we increase your revenue stream consistency?
Solution 1: Systematize and streamline your business so that it can be run with minimal input from you. (Think: The 4 Hour Work Week, by Tim Ferris)
Solution 2: Begin to detach from your business’ day to day functions before you list the business to ensure the market value exists in independent entirety.
Downside: Potential employee resentment
Upside 1: With clear systems in place, expectations and processes are well known and understood from the onset.
Upside 2: Decision-making is reserved for critical points. Day-to-day functions are less stressful because procedures exist to follow.
The best solution is to take on increasingly longer personal projects to test the staff and system to make sure that your business can run with minimal supervision from you, the owner. (For example: a leadership position in an association or charity, or local government) Every now and then, a staff member will feel resentment that the owner is off doing his/her own thing while they are stuck “holding the bag”, but if the company culture is one of extreme customer service, and autonomous leadership is encouraged, the growth experienced and individual responsibility rewards everybody.
Company: A tool & die manufacturing company
Desired sale price: $7,500,000
Staff: One owner, 7 managers and 32 team members
Problem: The seller didn’t want competitors to know he was selling
III. Limiting Potential Buyers
A good business broker can help to create a longer list of potential buyers to market a business to. Often business owners wish to shelter pertinent information from competitors for fear it will be used against them in the marketplace but ignoring competitors as potential buyers AKA: Strategic Buyers, can limit opportunities for sale. While people do sometimes buy into a business with no previous experience, competitors are already invested and interested, and should not be sidelined. There are ways to discreetly inform potential buyers about the overall robustness of a business model without giving away too much proprietary information, and a good broker can help with this.
A great example of this involves a company that I sold in 2018. The owners did not want to approach strategic buyers for fear of allowing the competition to see “inside” their company; additionally, the sellers did not want a buyer to consolidate their company and put its employees’ jobs on the line. I respectfully obeyed my sellers wishes by not directly contacting competitors or companies in the same field.
Interestingly, we were approached by a private equity company who owned a strategic platform company. After meeting with the management of this company, my sellers realized that they would be a fantastic synergistic buyer – one with the ability to offer a whole new set of products to its customers. Now, despite this, the buyer still had to compete with other very interested parties. At the end of the day the strategic buyer made the highest offer (in cash) and closed the transaction quickly. Keep an open mind and hire an experienced broker you can trust to manage this process. You NEVER know who the right buyer is.
How do we protect your privacy without limiting buyers?
Solution 1: Strategic partners can help everyone in your organization with the right fit.
Solution 2: It is always wise to use a business broker.
- A business broker can keep inquiries at arm’s length and confidential.
- Business brokers have more resources and connections at their disposal than the average business owner would have. They more than make up their fee in creative solutions, and in getting an intricate deal successfully to the closing table.
Downside: Rumors can make customers nervous.
Upside 1: Strategic partners and competitors’ acquisition strategy can make economies of scale and other products available and affordable to benefit not just your clients, but your employees, too.
Upside 2: Synergies in business change all the time. Keeping an open mind and working with an experienced business broker who understands your business can only help you secure a great future.
Overall, an amalgamation of strengths creates a win-win for both businesses with Mergers and Acquisitions. The book, Blue Ocean Strategy, outlined the early 2000s trend in business of “co-opetition” as opposed to traditional “competition” in overcrowded markets. The concept being that together the participants had more power to shift towards a new way of serving their market. For example, the AirFryer that offers a completely different way of cooking, thereby creating their own niche market within the crowded countertop kitchen appliances space.
Not all shifts are disruptive, they can serve a new need previously underserved. Mostly, they reframe the market need and deliver fresh perspective from a position of strength. Very often, a consultant can see the forest of opportunities when a business owner is in the daily routine of going tree to tree; which is another reason to engage your business broker early on in the process to sell your company. This way there is time to plan and lay the right foundation for a successful sale.
Hopefully, now you can see why (and how) it is important for you to consider not only how you run your company day-to-day, but also who you will allow your company to be marketed to. The more independent a company is from the owner’s oversight, the stronger the product/customer relationship and the wider net you allow your broker to cast, the more successful you will be during the transaction process.
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Please feel free to contact John Geiwitz at 904-412-5771 or Johng@tworld.com to schedule a free strategizing session on the best ways to valuate and get started designing your most profitable exit strategy today. John is the top producing business broker with Transworld Business Advisors in NE Florida and specializes in transactions ranging in size from $500,000 to $10,000,000. Click Thejacksonvillebusinessbroker.com to learn more.
