When to Sell
In the mid-’90s, Vistage speaker Peter Collins surveyed more than 400 business owners (all Vistage members) about their exit plan. Some of the more interesting findings included:
- Three-fourths of the owners had more than 50 percent of their net worth tied up in the business.
- A majority did not know the value of their business.
- Eighty-five percent had no exit plan whatsoever. The 15 percent who did were all over age 65.
- A large majority anticipated selling their business at a “round” age like 50, 55 or 60.
- Eighty-five percent said they would sell now if they were “sick, losing money, the competition was killing them, or they got a great offer.”
The really interesting part? These “strategies” almost certainly guarantee a less-than-successful sale of the business.
“Selling your company represents the most important financial decision of your life,” insists Collins. “Trust me, this is not the way to do it. The time to sell is when you are on top, not when you aren’t enjoying the business or it has hit an economic downturn.”
Phillip Currie , a Vistage speaker who runs a San Diego-based merger and acquisition firm, agrees.
“The time to sell is when the future of your company looks brightest,” he explains, “not when you’ve reached a peak or have entered a down cycle. In general, buyers put a lot more value on future potential than on past performance. Unfortunately, most business owners overlook this key point and as a result, focus on the wrong things during the deal. They think they’re selling past performance, but what buyers really want is a return on their investment, which can only come from future opportunities.”
In particular, Currie recommends selling when:
- You have dominant market share or a recognized position, such as price leadership.
- You have some sort of technological or competitive advantage.
- Margins are good and have the potential to get even better.
- You have something — such as infrastructure, distribution or access to a niche market — that can be leveraged by the right buyer.
- Your industry and market are in an up cycle.
What to Do Before the Sale
Before posting the “for sale” sign on the front lawn of your business, Collins and Currie strongly recommend familiarizing yourself with the following concepts:
- Recognize that the company is the product. When selling a business, the company — not its products, services or technology — represents the ultimate product. According to Currie, the notion of “company as product” means that owners must pay attention to things like operations, systems, management, markets, future opportunities, intangible competencies and relationships with customers, vendors and employees — all the elements a potential buyer will scrutinize when giving the business the once-over.
- Look at your company through the buyer’s eyes. Like proud parents, most business owners tend to focus on the positive attributes of their company while overlooking any warts that may lie just beneath the surface. Buyers, on the other hand, look at everything. In addition to sales, inventory, debt load and other obvious indicators, smart buyers carefully scrutinize things like:
- The owner’s salary and perks
- Existing leases and other financial obligations
- Employee benefits
- Relationships with suppliers or vendors that are based on personal rather than business relationships
- Relatives on the payroll
- Club memberships, cars, planes, etc., paid for with company assets
“These things may make running your business more enjoyable, but they significantly dilute the strength of your balance sheet,” says Collins. “They also turn off potential buyers and lower the price they might be willing to pay. To get maximum value for your business, look at it from the buyer’s perspective and clean up any blemishes that take the luster off your company’s shine.”
- Understand the buyer’s motivation. Ask, “Who wants what my business has and can do more with it than me?” The answers, says Currie, can be found in your systems, processes, people, technology, teams, training, suppliers, customers, locations, geography or some combination of these. “Buyers seldom buy what sellers think they’re selling,” he points out. “To secure the best deal, you must know why a buyer would want you.”
- Enhance the intangibles that make your business attractive. This requires familiarizing yourself with the buyer’s world. Find out all you can about potential buyers’ companies, where they want to go and what they need to get there. Research their industries by attending trade shows, reading journals and joining associations. The more you know about buyers’ wants and needs, the more you can do to enhance the value of your business.
- Know the value of your business. According to Collins, many owners do not know how much their companies are worth. Often, they come up with a figure based on how much they feel they need to live on for the rest of their lives. Instead, Collins recommends a formal appraisal, updated on an annual basis. In particular, be sure to use valuation methods that potential buyers of your business might use. (For a brief overview of valuation methods, see the article “Creating the Exit Plan” below). Without a reasonable idea of the value of your business, you have no real starting point to begin negotiations.
How to Get the Best Price
There is no such thing as the “right” price for a business. As a seller, you want to obtain the highest price while the buyers seeks to pay as little as possible. To ensure that you get the best possible return on your investment, Collins and Currie recommend the following strategies:
- Never state a price for your company. Let the market determine the price by discreetly obtaining offers from a variety of potential buyers. Once you state a price, you will never get more than that. In most cases, you will end up with less.
- Negotiate with multiple buyers. The quickest way to erode the value of your business is to negotiate with only one buyer.
- Seek out strategic buyers. What constitutes a strategic buyer? According to Currie, it’s “anyone who wants what your business has and can do more with it than you.” A strategic buyer looks at your potential and your intangibles. A financial buyer focuses on past performance. A motivated strategic buyer will almost always outbid a financial buyer.
- Use an intermediary. Intermediaries, such as business brokers and M&A specialists, offer many benefits, including:
- Experience selling companies
- Ability to find and qualify the buyers
- Ability to maintain confidentiality
- Experience playing multiple buyers against each other
- Knowing what information to release to buyers and when
“Most business owners only sell the business once; most buyers buy many times. So they have a distinct advantage,” says Collins. “No matter how sophisticated you may be when it comes to running your business, selling it is a whole different ballgame. Try to do it on your own and you will very likely get taken to the cleaners.”
Currie agrees. “In addition to their knowledge and experience, intermediaries also provide the critical ability to assess the deal from a third-party objective. They offer a sort of ’emotional firewall,’ that keeps you from getting too caught up in the feelings that surround the deal. Granted, these kinds of professionals don’t come cheap. But in most cases, you more than offset the fees by gaining a higher price for your business.”
- Understand product and industry life cycles. Sell your company when both of these are on an upward growth curve. Buyers want future potential, not yesterday’s track record.
- Stick with your exit plan. Your exit plan should guide every major decision. Stay focused on building the strategic value of your company and creating wealth instead of just a job. If the deal doesn’t jibe with your overall exit plan, don’t sign on the dotted line.