Business owners have spent their time building their businesses, not necessarily selling those businesses.  The business sale process is an entirely new and different business, and as a result, many business owners are unfamiliar with the process.

Reasonable Expectations

No, it’s not a mediocre Dickens novel; it’s what a business owner should have when selling a business.  “Reasonable expectations” does not mean undervaluing your business; it means a seller should expect a buyer’s offer to be based on today’s reality -- financial performance, company and industry trends, market conditions, etc. -- and not necessarily what that business may have been able to fetch a few years ago when sales and profits were higher and buyers were paying higher multiples of earnings.

Valuation is not a fiat accompli

Due to the recent economic slowdown many companies have shrunk and become less profitable, yet many business owners are holding on to peak year valuations.  Worse, those business owners often believe that the peak year valuation should be readily apparent to all bidders.   Unfortunately, that’s rarely the case. 

There are ways to get a compelling valuation in a down market, but the seller has to provide a roadmap for the buyer, and quite often that road map – or valuation proposition – will be different for different buyers.  Business owners often over look this simple and basic fact due to myopia.  They are so focused on their business that they become biased as to the valuation. The bottom line for the business owner?  Make your case; don’t expect the other side to do it for you. 

Communication

The key to selling a business, especially if a compelling valuation is the goal, is communication.  The seller needs to be able to explain the valuation proposition(s) to the buyer, repeatedly explain that (those) value proposition(s), stay on top of the selling process, proactively prepare for objections and the inevitable pushback from a buyer, and most importantly, rapidly respond when a buyer has an objection or discovers a problem. 

This needs to be done accurately and honestly.  Tout strengths, yes, tell the story, absolutely, but also disclose problems and potential issues.  These “warts” will mostly likely come out during due diligence, and if a seller discloses these issues early in the process seller will be able to frame the discussion.  Here’s the key when disclosing issues or problems: Don’t editorialize; just provide the facts and leave it at that.

You can’t do it alone

Well, I suppose a seller could do it alone, but that wouldn’t make much sense.  A seller will need: 1) An attorney to draft (or edit/revise) the purchase agreement; 2) accountants to count to audit or review the numbers and more importantly, interface with the buyer’s accountants; 3) advisors to negotiate the deal and to make sure it gets across the finish line.  It probably makes sense to do some planning with a wealth advisor BEFORE the process, especially if the seller is contemplating retirement.  As amazing as it may sounds, a seller may discover that the lifestyle he wants to lead post sale will require less money than previous thought.  It just takes specific planning instead of back of the envelope guesswork.

Creativity

Invariably, and especially in today’s market, a buyer and seller will have a gap valuation.  If both sides are willing to be creative, structuring can provide bridge valuation gaps. While cash at closing is great, and definitely preferred, but the seller may be able to garner a larger price if he is amendable to earn-outs and/or accepting a seller note.

How do you know when you’ve got a deal?

Signing a term sheet or a letter of intent (LOI) does not mean you have a deal.  In many ways, the LOI is simply the beginning of the process.  So when do you get across the finish line?  When the money hits your account.  So this begs the question: How do you know you have a real buyer?  That will be answered next time!

Signing a LOI does not mean you’ve closed the deal.  In many ways, you’ve only just begun.  LOIs usually include a “lock up” period of exclusivity which prohibits the seller from talking with other potential buyers.  This results in a power shift to the buyer’s favor.  

Once the LOI is signed due diligence begins.  Due diligence means “opening the kimono” and providing the buyer with intimate details of the business including but not limited to financials, customer information, pricing detail, sales pipeline, contracts, employee compensation, and more.  What happens if a buyer, especially if that buyer is a direct competitor, walks away after reviewing all this sensitive data?

Prior to signing that LOI, a seller should take time to determine if the buyer is “real” and whether that buyer can close the offered deal.  Since that’s a rather subjective comment, here are 14 issues a seller should consider when selecting a buyer:  

1. Is the deal too good to be true?  That great deal may be nothing more than a Trojan horse, setting up a scenario where the buyer says, "I want to do the deal as we agreed, but my bank and/or investors is/are balking..."
2. How is the buyer planning to finance the transaction?  Do they have the cash, are they planning to tap a bank line, or are they asking you to help with the financing?
3. Will the buyer – especially a buyer already in your industry and market – “recrunch” the numbers during due diligence and decide it is easier/wiser to invest that same money in the existing business as opposed to paying instead of overpaying for your company? Will they use this as a cudgel to renegotiate the deal?
4. What is the form of the offer?  Will 100% of the proceeds be paid at closing? Any hold back? Any contingent payments or seller note or earn out? Are you swapping stock?
5. How much of the proceeds will be placed in an escrow account?  What are the reps and warranties associated with that escrow?  Who controls the release of that escrow?
6. Does the buyer need to raise cash from outside investors to finance the deal?  Will outside investors balk at the deal the buyer has on the table?
7. Is it a stock or asset deal? Does it make a difference to you?  Have you talked with you accountant about your specific tax situation?
8. Who takes AR?  The AP?  Are your currant assets and current liabilities all within terms, or are you facing a substantial post closing adjustment? 
9. Is your inventory 100% salable?  Will the buyer claim some inventory is unsalable and use that as a means to reduce price?
10. Does the deal include a working capital adjustment?  What is the basis of that working capital amount?  Any other post closing adjustments?
11. Who pays off any long term debt, you or the buyer?
12. What happens to the line of credit?  Assumed by buyer? Do you pay it off?  Is the buyer going to take over the company but leave you on the hook for some/all of the company's debts?  This is more common than you may think.
13. What are the tax implications of your AR?  Will this amount be taxed as ordinary income?  Have you talked with your accountant about this issue?
14. Are you signing a non-compete agreement with buyer?

 Analyzing offers from multiple buyers can often involve alchemy.  Total deal value is a key concern, of course, but so are many, many other issues.  An owner seeking to sell a business is wise to retain capable, professional, and experienced council – investment bankers, accountants, attorneys, wealth advisors – to help negotiate the best deal possible…and safely land that deal.  Remember, it’s not a deal until the wire transfers clear.