Part 5 of 5 – ‘Twas No Overnight Success Story!
When Toaster Installers Inc sold their business, it was an unexpected opportunity. One day we were in an advisory meeting confirming the next investment in their growth plan … and the next day I was introducing them to a potential acquirer based on that plan.
Like so many overnight success stories, this was a deal several years in the making – going all the way back to the young couple doing $60,000 in monthly revenue who had no idea their business might one day be valuable enough to sell.
(Catch up on Part 1 – How we Sold a Business for Profit x 250 | Part 2 – Valuation Methodologies for Small Businesses | Part 3 – How we convinced the Buyer to happily pay more | and Part 4 – How the Accountant nearly killed the deal.)
And they were a terrible client! Imagine how much more, or how much faster we would have moved if valuation and sale was their primary content?!
So what do you need to do if valuation and sale is a primary context in your business?
While there are clear differences, over the past four articles you can see I like comparing a business sale to selling a house. If you need to exit the asset no matter what, it will be a distressed sale and you won’t receive full value; if you can make it as attractive as possible, you potentially create a competitive ‘bidding war’ and can sell for well above list price.
The Business Sale Process has three phases: Preparation, Marketing & Sale, Transition.
When the sale isn’t rushed, the ideal Preparation process is:
- Review the business today – current valuation and any changes (especially quick wins) that can improve it
- Set a plan for making those changes – anything from 3 months to 3 years depending on what needs to shift and how large a sale price you want
- Execute the plan – while simultaneously (at the right point) starting the marketing and sale process
Why would someone buy your business?
The question I love to ask in these discussions is “Could I buy your business?”
Your answer will reveal a lot about the technical requirements of your target market – ie, do they need specific industry experience, qualifications, capability, or networks. Are they buying a business or buying a job? Is there anything at all for them to actually buy – remember, you have to think like a Buyer not like the Seller with your years of emotional turmoil.
Beyond a random investor, why would a strategic acquirer buy your business? This will reveal the key elements they value more, and this will be different for different acquirers.
For example, a VC-funded start-up might highly value your Brand history and database; an established competitor may value your product but not your brand. This conversation helps refine the plan at step 2) above.
Case Study: one of my clients has a clunky bespoke IT system that an acquirer may see as a risk (and therefore devalue them); however, their most likely acquirer is one of their competitors who already have an IT system they like. So there’s little-to-no value in improving their IT system because an acquirer won’t value it.
The Preparation phase usually includes some business or capacity planning for future growth. An acquirer is buying the future of your business – to the extent they look at past revenue and profit, it’s only as a guide to the future. Give them confidence that the business will grow, and they will value that – especially if they see buying today as a bargain compared to buying in the future.
How much will this Cost?
This step in the process is usually a Fixed or Project Fee from the accountant / broker / advisor / coach.
Some may integrate this investment with the costs in the next step – I like to see them as two separate choices. A formal business Valuation from a good accountant can cost a mid-sized business $5,000 – $10,000. Unless you’re keen to go to market immediately, a less accurate (but much simpler and cheaper) valuation guide may suffice.
My team’s Business Review starts at $6,000+gst, and can be tailored to focus on key valuation and sale principles.
A complete strategic analysis and valuation is approximately $40,000+gst, but is a wise investment if you have a 3-5 years timeframe and are looking to add $6million+ to your business valuation in that time.
Marketing & Selling a Small Business
Once you have started implementing the changes to improve your valuation, the process for Sale begins. Like selling a house: how do you get your business in front of as many potential purchasers at the same time?
A useful philosophy is “When you want to Sell, go to market to raise capital”. Businesses raise capital in order to accelerate growth – when you tell the world “we are fundraising” it communicates “we are strong and ready to grow fast”, which can motivate those acquirers to swoop.
We would prefer not to simply hang out the ‘For Sale’ shingle, as this is more common in smaller businesses. If you go down the route of using a Business Broker, make sure they have experience selling enterprises of your value (and ideally, networks in your sector) – many Brokers specialise in “Cafes and Hairdressers” which is a very different market to the mid-tier businesses I work with (and write about).
Directly approaching your target acquirers (openly about acquisition, or in a research or fundraising context) can work, if you have a clear pitch for why this is a strategic acquisition on their behalf.
Creating a short-list and planning the approach to market is a valuable part of my coaching in this situation. Identifying those companies, their specific value proposition, and how/who to approach is important. I would normally start horizontally (competitors) and vertically (connected steps in your value chain), while also considering acquisition by a large client or other ‘left field’ opportunities.
Sometimes these conversations can be wildly different. One consulting company my team took through this process was valued (by their accountant) in the $100,000s because their net profit was weak; ultimately we helped them sell for around $1.5 million – they had some software and a database that was worth a lot to a larger consulting firm, and that’s what was sold.
Selling Your Business While Leaving a Legacy
Legacy thus becomes a factor in the Sale process.
- Would you sell to a company that wanted your database and brand, but was likely to wind down your products and team?
- What if someone more aligned culturally offered to buy your business, but for half the money?
The Sale process, especially in business, is as much about the Contract terms as it is the Price. Would it be Vendor Financed (ie, you fund the acquisition and are paid over time)? Some acquirers may ask you to retain some ownership, or take on an employed role with the business during a transition period. Ultimately you have to decide what combination of factors best supports your life moving forward.
One of my clients received a great offer some years back, but when we reviewed the terms the acquirer was essentially buying them over 4 years using their own profits.
They literally would have been better off keeping the business for 4 years and then closing the doors!
Negotiation thus becomes an elaborate and emotional process (and can also risk being a major distraction to ‘business as usual’, especially if you receive a great offer that comes with lengthy Due Diligence requirements). Having a Broker (just like having a real estate agent) can take some of the time and emotion away from you, but tidying the business for inspection will still take more time than tidying a house!
Some acquirers like to negotiate directly, either because they feel they can push the price lower this way or simply because they trust your answers more than a Broker’s (Mark Zuckerberg famously bought Instagram by flying down to the owner’s home for the weekend and negotiating).
I generally recommend a middle ground, where you have some advisor support in the room during discussions and/or between conversations to help keep you clear and focused. Great, industry-specific Brokers however are well worth the cost.
Brokers and Coaches in this space usually charge a combination of retainer and a sale percentage – this aligns incentives (the largest part of their cost is when the business settles on terms you’re happy with) while also ensuring you remain committed to the process (if there’s an ongoing investment, however small, then a business sale remains one of your priorities).
You will also want a good accounting and legal team to ensure there are no landmines with your strategy, or the execution of the business sale agreement.
As a rough guide, you can expect the overall set of professional fees to be between 2.5% and 5% of the transaction. Some negotiators or brokers may suggest a more “win win” fee structure, such as 1% of the current valuation and 10% of any figure achieved about that.
Transition After Selling Your Business
This is where the house analogy really falls apart! It’s rare in SMEs for the business sale to be a quick transition.
The escrow period can last much longer, and the terms of sale may include some strict expectations about your involvement for a period and/or performance targets that must be met for you to be paid the full amount.
The Sale process can be an enormous distraction; the Transition period can be quite demoralising as “your baby” begins to change in a way you may not wholly agree with.
This is why many business owners take a lower sale price that lets them walk away.
Energetically, I recommend making the choice that you make and being happy that you made the best choice at that time (regardless of what follows).
The business owners I work with started and grew their businesses for some combination of income, wealth, and lifestyle. Ultimately selling your business can be the easiest way to realise that wealth, and live the life you choose. It’s not the only option, and it will never be an overnight success story.
So if a business sale, in part or in whole, is part of your business future … then let’s chat. If you can take on board the lessons I have shared in this series of articles, then perhaps one day you too will sign a contract that people say “Is too good to be true”.