Most wealth is in the form of privately held business equity.
October, 2013
Five years ago, after attending a Biz Buy/Sell presentation by an out of state Mergers and Acquisitions (M&A) firm, I published the below notes summarizing what I had learned. Since I wrote them, I find myself referring back to them continually whenever I encounter anyone who wants to sell their business - an occurrence which happens with increasing fequency as I encounter more retiring Baby Boomers.
Although I am not an M&A consultant or business broker, I have learned that there is work I can do that enhances success possibilities for them and their clients. I have also learned that most small businesses are too small to afford the help of such high-power talent. Regardless whether they can, my intention in sharing the below information is to help such small businesses enhance their success possibilities.
Here are ways I can help enhance your success possibilities in selling your business:
Don't put it off; contact me today!
Five years ago, after attending a Biz Buy/Sell presentation by an out of state Mergers and Acquisitions (M&A) firm, I published the below notes summarizing what I had learned. Since I wrote them, I find myself referring back to them continually whenever I encounter anyone who wants to sell their business - an occurrence which happens with increasing fequency as I encounter more retiring Baby Boomers.
Although I am not an M&A consultant or business broker, I have learned that there is work I can do that enhances success possibilities for them and their clients. I have also learned that most small businesses are too small to afford the help of such high-power talent. Regardless whether they can, my intention in sharing the below information is to help such small businesses enhance their success possibilities.
Here are ways I can help enhance your success possibilities in selling your business:
- Coherent accounting records. Business buying decisions begin with the presentation of coherent accounting records to prospective buyers. This is a huge trust-builder that makes possible the totally palms-up honesty that is absolutely essential for a successful, mutually rewarding transaction.
- Good documentation: Business Plan, Marketing Plan, SWOT Analysis, Pareto Analysis, procedures manuals, job descriptions, organizational charts, etc.
- A coherent Customer Relationship Management (CRM) system. In the final analysis, what buyers are really buying is your customer list. The better the list, the better the deal. This same system can also be used to manage relationships with your prospective buyers and organize your Limited Auction.
- A scaleable, user-friendly, easy-to-learn Operations Management System (OMS). I do custom OMS Application Development, focusing on Productivity and Project Management. I call the suite of applications I've developed "HWD" for How We Did, How We're Doing, and How We'll Do. Let me provide one to your business. More info here.
- Positive trends. An irony in Biz Buy Sell is that sellers want to sell when their business is undesirable, and don't want to sell when it's desirable. I can help make your business desirable, then help you remember that the time to sell is when you don't feel like selling.
- Finding good talent. As you continue focusing on the day-to-day necessities of running your business, I can work behind the scenes for you to find and work with professionals who can help you sell your business at the best possible time, for the best possible price.
Don't put it off; contact me today!
What I Know About Biz Buy/Sell:
An Open Letter to Clients, Prospects, Affiliates, and Colleagues
Notes from a 2008 Mergers & Acquisitions Presentation
August 27, 2008
An Open Letter to Clients, Prospects, Affiliates, and Colleagues
Notes from a 2008 Mergers & Acquisitions Presentation
August 27, 2008
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Greetings -
Since about 2002, I have studied, and been involved in, the effort to sell privately-held businesses. While I have learned a lot, I have yet to be directly involved in a successful sale, with the exception of the sale of our own family business in 1993, three years before I launched Making End$ Meet. My 2002 involvement began at the request of a client who wanted to sell his business so he could retire to Mexico. Others' requests soon followed: "Please help me sell my business; I want to be done." In response, I researched the subject and acquainted myself with nearby (Seattle) business brokerage talent, to whom I introduced my clients. In several cases, the brokers took them on and tried (unsuccessfully) to help them sell. One tentative conclusion I've drawn from the experience is that brokers' approaches are too passive. What they seem to do is advertise the business and wait for buyers to respond. It seems to me that what is called for is a more active approach, finding the buyer instead of waiting for the buyer to find you. Currently I'm helping one client do precisely that, designing and executing a marketing campaign to sell the business itself, in the same way that one would go about marketing the business' products or services. Yesterday, on his request, I attended as his representative an all-day seminar in Seattle presented by an out of state Mergers and Acquisitions (M&A) Intermediary firm, and learned some really helpful things, which I am writing to preserve for my own benefit, and also share with you. Here are the key points I learned: Confidentiality is paramount. The more people know your business is for sale, the less you'll be paid for it. "One buyer is no buyer." If you're dealing with only one prospective buyer, then that buyer has a monopoly on you and can dictate price & terms. The goal should be to conduct a "Limited Auction" in which multiple prospective buyers bid against each other for your business. The "80/80 Club" is the 80% of business sellers who are 80% underpaid for their businesses because they managed the sale poorly. A successful sales effort is a sixteen-step process. The conventional six-step process - Decide to sell, Determine the asking price, Collect documents, Find a buyer, Negotiate, and Close - is wrong. Sellers commonly say, "If the right deal came along, I'd take it." This passive attitude accounts for the 80/80 club phenomenon. Deals don't "come along." They are proactively developed. Optimal Buyers don't care about location or industry. They care about Return On Investment (ROI). One of the things that characterizes an Optimal Buyer is wherewithal to pay by wire transfer. They are interested in the business' future: what they can do with it, and what it will do to their business. Neither of these considerations is determined by the business' past, or is predictable by the seller. "The buyer rarely buys what the seller thinks he's selling." - Peter Drucker. Examples: Rubbermaid bought a bucket and mop manufacturer for its client list, not for its products. Clorox (makers of charcoal briquettes) bought Duraflame (makers of presto fireplace logs) to regulate their seasonality, so they'd have both a summer and winter product. Creating documents, finding buyers, and negotiating should be handled by professionals. When sellers try to do it themselves, they fail. Good documents include expensive, hard-to-find industry data that proves the business' value - data that is only accessible to large professional firms who can afford to spread the costs across many clients. Finding buyers involves thinking objectively, outside the seller's usual mental box. And negotiating is too emotional for most sellers to handle well. Finding buyers - crafting the prospecting pool - is the single most important step. Documents should be updated twice over the course of the entire process. The Prospecting Pool should begin with 300-500 prospects, funneling down to about 6 Limited Auction participants. Formulas for calculating price are used by buyers to lower the business' value in the seller's mind. Ultimately a business' price is determined by what the market will bear, and the best way to ascertain that price is via the Limited Auction. Timing is very important. Currently, we're nearing the end of a Seller's Market. Previous sellers markets were in the 1890's, 1920's, 1940's, 1960's, 1980's, and 2000's. Most sellers (mistakenly) sell in a Buyer's Market. Interest Rates affect price inversely. Small Businesses are in high demand by professional investors because of their growth potential. For more info,see this Business Week article. Four key documents are necessary in the above-mentioned sixteen-step process: the Evaluation of Enterprise Value, the Financial Review & Ratio Analysis, the Offering Memorandum, and the Confidential Business Profile. The Evaluation is for the seller's eyes only. The other three are for the buyer. The Confidential Business Profile is a brief, one or two page anonymous summary of the Offering Memorandum, and is used to introduce the business to prospective buyers. After they sign a Confidentiality Agreement, they receive the Offering Memorandum, disclosing the business' identity and financial details. An Optimal Seller is committed to selling, and decisive. Usually seller's aren't, they're ambivalent. Sometimes they'll act ambivalent to avoid being low-balled, but this ambivalence is self-defeating behavior. The right way to avoid being lowballed is through the Limited Auction. Deals are 80% people, 20% numbers. Scrupulous honesty is essential, being totally "palms up." The truth never killed a deal. 90% of sellers aren't "palms up." Sellers (entrepreneurs) are good at creating something out of nothing. Buyers are good at taking the entrepreneur's creation to the next level. Intangible Assets. Currently, 85% of a business' selling price is accounted for by intangible assets, the things not listed on the Balance Sheet - things like client lists, accounting records, reputation, distribution channels, trade secrets, licenses, employees, copyrights, engineering drawings, etc. etc. etc. Retiring Baby Boomers are the main cause of the pending Buyer's Market. They'll all be wanting to sell their businesses. Cost. On average, the presenting M&A firm spends $150,000 to do a deal. Most of this cost is in preparing documents and developing the buyer pool. They charge an up-front retainer of $32,500 which is deducted from the commission on closing. Their commission schedule is regressive: 10% for the first million in price, and lower percentages for each successive million. The effective commission percentage on a $5M deal is only 4%. Because so many sellers are ambivalent, buyers care that sellers pay the retainer: it's proof of their commitment to sell. This particular M&A firm organizes an annual Buyer Symposium at which they present businesses for sale to interested, qualified buyers. Access to this symposium is one reason to work with them. In two days, 343 Confidentiality Agreements were signed during last year's symposium. PIGs, PEGs, FOGs. Optimal Buyers include groups: PIGs (Private Investing Group), PEGs (Private Equity Group), and FOGs (Family Office Group). A FOG is an investing organization of a very wealthy family, typically with over $50M to invest. Optimal Buyers include Qualified Individual Investors, Investment Groups (PIGs, PEGs, FOGs), Larger Private Companies, Public Companies, and International Buyers. Non-Optimal Buyers include competitors, vendors, customers, employees, management, and relatives. Competitors are appropriately included in the prospecting pool if: (1) They have the wherewithal to pay, (2) They're not engaging in predatory "window shopping", and (3) The reward of including them in the pool exceeds the risk. What qualifies an Individual Investor is his/her willingness to participate in the Limited Auction. If they balk or behave indignantly, they're unqualified. In this M&A firm's experience, private companies account for the majority of the investor pool. Regardless how a seller may feel about selling to International Investors, they should still be included in the prospecting pool to bid up the price, since the Limited Auction is not binding. A deal isn't closed until the money is in the bank. Many, many people make the mistake of believing they've closed a deal by signing a Letter of Intent or closing papers. The deal is closed when it is funded, by wire transfer. Never do your own negotiating. Negotiations are not binding, they are always subject to the approval of buyer & seller. If the seller is to be retained during the transition period to orient the buyer to the business, a Consulting Contract is preferable to an Employment Contract for flexibility and independence. I hope you find these lessons interesting and useful. If you have any questions or comments about selling a business, please feel free to contact me. At your service, Kris Freeberg, Economist Making End$ Meet |
