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Keys to Selling a Business

6/23/2015

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For all entrepreneurs, selling a business is a complex and delicate process that requires preparation, shrewd maneuvering and self-control — while still running a company. Considering the tensions, it’s no surprise a lot of sure-fire deals short-circuit at the negotiation table, souring what should be a cause for celebration.

For many business owners striking deals is a core competency. At any given time, a CEO might be involved in day-to-day transactions with customers and vendors, decision-making with colleagues and partners, or deliberations with senior management and a board of directors. But ultimately, negotiating and closing the sale of a business takes greater acumen, nerve and awareness than any other transaction in an owner’s life.

Ideally, an exit plan is devised on day one and baked into the business, making an eventual sale as strategic and streamlined as possible. Realistically, this level of preparedness borders on omniscience. It’s unlikely that any business follows a strict timetable, growing exactly according to plan. Whether the sale is impeccably planned or event-driven, a few basic guidelines can help a business owner more predictably drive a positive outcome.

Embrace Process

Selling a business is a process that culminates in a closing. It takes time to build a team, market the business, conduct due diligence, negotiate and close. Start to finish, the sale of ones’ business could take well over a year. Even with an eager buyer on the line, negotiations typically play out over several months.

Given the level of complexity of such a transaction, the last thing a seller wants is to be under the gun. Of course, some sales are forced by unplanned events — the three dreaded D’s, death, divorce, disease — but entrepreneurs will be best served to resist sacrificing process for pace. Shortcuts do not make a more efficient sale. The key is to be prepared enough to strike while the iron is hot.

Partner Up

Finding a qualified and experienced M&A advisor / Business Broker is key to a successful sales transaction.  A broker or M&A advisor can provide expertise that leads to a superior outcome. Not only do they have a specialized Rolodex of contacts, knowledge of business synergies and experience selling and buying similar businesses, but they allow a CEO to keep some focus on running the business during a critical time. An intermediary also provides cool-headedness during a sometimes antagonistic negotiation. Deal making has been described as 50% economics, 50% emotion.

Along the way, an accountant and lawyer maybe necessary. Before a buyer comes to the table, a seller will have to assemble a mountain of bulletproof paperwork, including a business overview, client and supplier contracts, confidentiality agreements, insurance policies, relevant compliance reviews (environmental, occupational safety), an up-to-date balance sheet, and at least the last three years of profit and loss statements and corporate tax returns.

The Devil is in the Details

Particularly in a transaction of such scale and complexity as the sale of a business, the details cannot be overlooked. Nobody likes surprises, least of all potential buyers. Resolving all outstanding legal or accounting issues before bringing a company to market can help avoid any peripheral concerns. Transparency is catnip for deal makers, instilling confidence and good faith where doubt once lurked. Cautious buyers do not pay a premium.

No Pain, No Mutual Gain

Negotiation has been dubbed the art of letting opponents have your way, but a more applicable — and political — definition is that negotiation grants each party what it wants most at the least cost to the other. Especially considering the lengthy, involved process of selling a business, the resulting deal should be viewed not as a zero-sum game but as a compromise that leads to mutual gain. A win-win between buyer and seller is not unattainable, but often takes months to finesse.

No matter how you define it, negotiation is a meeting of extremes, with the seller and buyer frequently at odds. However, hard-nosed negotiating does not preclude accommodation. While sticking points abound, including price, payment schedule, deal structure — the legal and financial form that the deal takes — a principled process will focus on compatibility, preventing hurdles from becoming landmines.

Know Thyself

A seller needs to identify precisely what a successful sale means to them. This is not as simple as it sounds. Concessions will be necessary, so prioritizing goals — cash, a job, freedom from future liabilities — and identifying bargaining points is key. Sale price is often paramount, but it should not be the exclusive focus. Spending time on deal structure and evaluating the impact an acquisition will have on the business and its employees are important exercises for a selling CEO. Taking into consideration the different type of buyers can help a CEO weigh where his bargaining chips might lie.  For example, a private equity firm would treat the business differently from an existing competitor or a first time business buyer.

Fixating on price is myopic, and often creates an adversarial and unproductive negotiation. In order to settle on a sale price range, obtain a value from an outside expert or CPA, then identify a “best case” price before moving to a more realistic go-to-market price. This can be difficult for business owners, who tend to be generous with their own valuations. Lastly, the minimum acceptable price for the business should be determined. Below this threshold a business owner should be prepared to walk away. 

Stand In Their Shoes

A seller should strive to understand the buyer’s motivation, finding a way to dovetail interests by evaluating the priorities of the opposing party. In-depth knowledge and understanding of the buyer not only encourages cooperation but can boost a seller’s bargaining power. Knowing what strategic value the deal holds for a buyer — the added capabilities and competitive advantage conferred, rather than just the financial value — can help a seller command top dollar. Finally, do not build castles in the air: No matter how amenable a potential buyer seems, a letter of intent is not a blood oath. Business owners should always have a plan B if negotiations fizzle.

Of course, not every deal was meant to be. Never be afraid to walk away. If a negotiation does break down, end on a positive note, leaving open the possibility of resuming talks. However, never threaten to walk away unless its genuine. It’s not a bargaining tactic.

Inking the Deal

Closing is not the time for second-guessing or skepticism; it is the consummation of a protracted and mindful process. A sale should bring certainty, not unease. That is why it is best to adopt an approach that embraces process, addressing the complexities of a deal full on, rather than shrinking from them. From pre-sale planning to marketing to negotiation, each stage should be used to strengthen the deal, not just entrench the seller-side position. What’s more, a deliberate and painstaking process not only reaps rewards, but does credit to the years of work a CEO spent building his business.

As a selling CEO, this will be the biggest deal of your life. Make the most of it.
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Importance of Cash Flow Before Selling Your Business

6/15/2015

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Axial.net recently wrote a great article about maximizing cash flow prior to selling a business.  This is one of the most important pieces of selling a business.  To many times owners wait until cash flows start to decline before thinking of selling their business.  This oftentimes creates fear amongst buyers because they start to ask will this decline continue and how far down will it go before I can expect financials to stabilize or preferably start to improve.  Because of this fear buyer's will greatly discount their offer price.  Here is Axial.net's article with only a few changes.  

The most important thing for any business owner looking to sell is to prove the success and sustainability of his business. There are a number of financial metrics one can use to do so, but in almost every case it is essential that a business owner presents a strong picture of a company’s cash flow. For investors, particularly, this is an important measure as it represents the “excess” cash a business has after paying all of its expenses and meeting commitments to employees, and eventually represents what is left over to pay to investors or back to the owner.

Cash flow, Seller's Discretionary Earnings (SDE) and Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) are the main tools buyers use as a measure of the performance of a business.  SDE is typically used on main street businesses whereas EBITDA is primarily used on businesses with over $5MM in revenue or $1MM in net income. However, cash flow is used on all businesses.

Focusing on cash flow allows a business to account for all capital expenditures, working capital requirements, current debt payments, taxes, or other fixed costs which buyers will not ignore. The cash needed to finance these obligations will need to be defensible if the business wishes to grow, compete, and maintain or increase profitability.

Before approaching buyers, there are a couple of ways a business owner might look to boost cash flow in order to bring the best deal to market:

Reduce overhead

One great place to start is to save money with your vendors. Do a quick inventory of what services you are paying for. Are there any services you are not using? Do you have any equipment that is lying idle? If so, trim the fat and lower your costs.

Once you have eliminated any services you don’t use, take a look at the ones you do. Are you receiving all agreed-upon discounts? After looking into this detail, consider negotiating with service providers to secure a better deal.

Pursuing some type of supplier financing agreement may be an option for businesses who want to lock in competitive rates and quicken the production to sale cycle. Exploring negotiation around trade credits might also be an opportunity. Receiving a modest discount by paying bills early can produce great results. For example, paying all bills due in 30 days within 15 days might result in a 1 percent discount.

Do a customer audit

A late paying customer isn’t necessarily a bad customer. Many businesses are too quick to write-off customer billings. Instead, explore new payment plan options with these select customers and make a focused effort on collecting old billings even if it means compromise or turning to a collections agency.

Pursue growth strategies

Many businesses spend years pursuing aggressive growth strategies even if the end goal is to sell, with the idea of a better outcome for the business and better sale price for the owner in mind. This might mean taking on growth capital, exploring expansion into new geographical markets, pursuing M&A targets of smaller, peer or competitive companies in your industry, consider partnerships, horizontal or vertical integration strategies, or other more organic growth mechanisms.
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    Jeremy Hovater

    CEO
    Sunset Insurance Group

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