Cash Out - Is Now the Right Time to Sell Your Business?
Selling a Business Takes Planning
Is it time to cash out and reap the financial rewards of the business that you've built? Unless you intend to have family members take over your business, you are eventually going to look for a buyer. You have spent years building your company, and now it’s time for what may be the largest financial transaction of your life. But before we look at the intricacies and the strategies of selling, we have to look at some basic issues before you go to market. Remember: Selling your business should be part of your business plan.
Do You Want to Sell Your Business?
If your business is fulfilling your life both financially and personally, selling might not be a great idea. There is no possible way that I could make a recommendation here, even if you and I knew each other personally. I knew a guy who owned a large insurance agency. At age sixty-five, he was a fireball of energy, and his enthusiasm for his business seemed boundless. Nevertheless, he decided to sell and retire and do something he dreamt about all his life—he became an archaeologist. This is a decision that only you can make, but I suggest that your decision whether or not to sell should be the result of taking a hard look at reality.
Your age and health. Even if you had not thought about selling, your business plan should include the critical component of succession planning. I’m assuming here that your plan is not to have family members take over the business, so succession planning is really another way of asking this question: Are you prepared to take care of your family without the business? If you were suddenly out of the picture, would your spouse be able to run it? Would he or she want to? This is where the conversation necessarily turns to estate planning.
Market timing. If your familiarity with your industry tells you that the future looks rough, maybe you should ask yourself if you want to be a part of a tougher business climate. The flip side of this coin also lands in the same spot. If business is booming, perhaps you should take advantage of the boom by selling into a hot market. Look at the home construction business or any business having to do with real estate a few short years ago. People who had well-polished crystal balls sold in 2005. How is your industry, and where is it headed?
Are you tired of your business and looking for a new, exciting adventure, or are you simply ready to retire and smell the roses? If so, the obvious answer is to sell. There might be openings in archaeology.
When Do You Prepare to Sell Your Business?
The answer to the above question is right now. That’s right now. Before you question the sanity of what I just said, consider the following. I had no intention of selling my company in 1999. I didn’t even think about it. It wasn’t that I would never consider selling; it was just that I was having fun and making a lot of money, so why should I consider stopping the music? But one day I got a phone call from the CEO of a large publishing company who said he would like to have lunch with me. I will go into more detail on this later, but the point I am making is this: sometimes a buyer shows up when you least expect it. Opportunity sometimes knocks. Are you prepared to answer the door? The payoff of putting the principles of this book into reality is that your business will be in great shape at any time, ready to show to a potential buyer.
The Steps to Selling a Business
Hiring the Right People to Help You
Having someone else in the negotiating process is crucial. First, look to your existing advisors. Is your attorney or his law firm experienced in M&A (Mergers & Acquisitions)? This is a complex specialty, and you should have a frank discussion with your lawyer. I’m not suggesting that you go out and hire an expensive (and they are expensive) M&A specialist right away. But if you do, keep your contact with the attorney to a minimum until you have found a buyer, and limit your discussions strictly to legal questions. The hourly billing can add up fast. There are M&A consultants who are similar to high-priced business brokers but provide expertise and guidance way beyond simply finding a buyer. An experienced M&A consultant will work hand in glove with your attorney when the time comes. Because M&A consultants get paid a fee based on the sale, you do not rack up big legal fees in the beginning of the process. Your M&A consultant should be the person you do most of your communicating with. He or she will guide you on “going to market” and has the incentive to get you the most money because his fee is based on it. M&A is a game. M&A people know how to play it and win.
Research and Analysis: Who Wants to Take You to the Prom?
Working with your consultant, you will start your journey by researching the primary candidates, or types of candidates, who may be logical buyers for your business.
- Is it a direct competitor?
- Is it a competitor, but in a different market area?
- Is it a company that could grow rapidly if it acquired you?
Think synergy. Is it a company, perhaps from a different industry, that could acquire your business as a strategic asset? Remember the discussion in the previous chapter about Clorox buying synthetic log maker Duraflame to tie up supermarket shelf space to complement its Kingsford charcoal business? Also, remember my oil delivery friend who bought a burglar alarm business so he could market a new service to existing customers? If there is ever a time to think outside the box, this is it.
- Is the candidate company publicly held and traded on a stock exchange? Publicly held companies bring something special to the game: publicly traded stock. The price tag on a purchase paid with stock can often be huge. SEC requirements have strict rules on how much of the stock of the acquiring company you can sell in a given period, but don’t be concerned about your lifelong nest egg being tied up on the stock in one company. Without getting too complicated, you protect your downside by purchasing a derivative security known as a put. When you own a put on a stock, if the price goes down, you make money.
The Dance Begins
Your consultant or broker begins the process of escorting you to the marketplace of businesses for sale. He will use a multifaceted approach, including ads in the Wall Street Journal, Internet postings, word of mouth, surveying contacts in the industry, and generally getting the buzz going. Experienced M&A consultants or brokers have a well-developed list of contacts to whom they can drop subtle suggestions that they know of a company for sale. Good brokers are networkers, enabling you to tap into their network. They often earn their fee based on their contacts alone.
Getting You All Dressed Up for the Initial Presentation
Attitude. Your M&A person first needs to learn everything about your business. After all, you are the product he or she has to sell. Your M&A person will spend hours and days with you, getting inside your head, learning first about your attitude. That’s right, your attitude. What, you may ask, does your attitude have to do with selling your business? Everything! Your M&A person wants to know if you have the toughness to go through the arduous rounds of negotiations, and just how much you are willing to bargain to transfer the business to the seller. Your consultant wants to know if you are really willing to walk away from the table if an acceptable deal can’t be struck. There is an old saying in the art of negotiating, and it has everything to do with attitude. “If you can’t walk, you can’t talk.” If you are willing to call off negotiations that are going nowhere, this attitude, and that of your advisor, will show during the talks.
Practices. Your M&A consultant wants to know everything about your Best Practices and expects you to be blunt where some of your practices are anything but best. This becomes part of his or her sales presentation to a prospective buyer and the buyer’s advisors. Think of all of your practices as a PowerPoint presentation because that’s exactly what it will become. Going through every aspect of your business and showing how your practices have made a powerful contribution to its success makes for a very compelling presentation. Depending on your skills as a presenter, you both may agree that you, not the M&A consultant, will make the presentation to the buyer. This is usually done in a formal meeting where the buyer and his advisors will be sitting there with one basic question: “Why should we buy you?" Only you can make the decision whether you should make the presentation. Caution: some people—maybe you—are more impressed with their own perceived sales ability than the person on the other side of the table might be. A few years ago my wife and I were shopping for a new house. We found one that really appealed to us. When we went to the showing with the broker—a very experienced salesperson—the owner cleared his throat and delivered a non-stop speech about the splendors of his dwelling, following us around to see if we had any questions, and basically making such a pain in the ass of himself that we couldn’t remember the details of the house after we left. We didn’t buy the house. The point is this: work with your consultant to see if you or the consultant should make the presentation.
Technology. This is part of your initial presentation along with Best Practices, but you need not go into excruciating detail, which will be left for the due diligence phase if the deal moves forward. The purpose of showing the technology aspects of your business is to demonstrate to the buyer that you are using every resource available to you and that these resources add to the value of your business. Here, as elsewhere, it is important not to exaggerate or to gloss over deficiencies. If your network needs upgrading, say so. The buyer wants to know, if he turns the key, that this thing is going to start.
Anatomy of a Deal
No two business deals are alike, but there are certain waypoints or deal components that are usually present. The details, of course, will vary, but there is a general outline of what any deal looks like.
Non-Disclosure Agreement. It’s in both party’s interest that the negotiations remain strictly confidential and that even the fact that discussions were held should not be made public. If the deal does not happen, the buyer doesn’t want you to discuss the negotiations with another party that the buyer might want to acquire. Likewise, as a seller, you don’t want the details leaked to another potential buyer.
Initial meetings. During the initial meetings, a lot of general knowledge about your business is disclosed to enable the buyer to decide if it makes sense to go forward. For good reason, both sides usually want the other to come up with a price. The buyer wants to know if the seller is going to be reasonable, and the seller wants the same from the buyer. In the sale of my company, the buyer flatly insisted that we come up with a price. Since the deal would stall if we didn’t put a number to it, we agreed to go first, and my attorney hit the buyer with an absurdly high price, one that I couldn’t justify by any manipulation of the numbers. But it didn’t kill the negotiations; the buyer’s acquisitions team decided to move to the next phase with their own numbers in mind.
Letter of Intent. This is not a binding contract to sell your business but, as the name implies, an expression of the buyer’s intent, subject to due diligence and the seller’s disclosure of every detail asked. It’s as though the buyer said, “Okay. If you can show us this and that, here is what we would be willing to pay.”
Structure of the Buyout
Cash. This is the best for the seller because once the deal is done, it’s done.
Stock or stock and cash. If the buyer is a publicly traded company, this is a common deal. If however, it is closely held, it can be a different story. A closely held company is one that does not sell its shares to the public through an exchange. The stock in a closely held company often has no value because there is no market for it, and the value turns into money only when the company is sold. Notice that I say often, not always. It depends on the acquiring company. If Mark Zuckerberg offered you Facebook stock in 2010 would you have taken it, even though the company was private? Of course you would. The company that bought mine was closely held, but it was owned mostly by a private equity firm. Private equity firms are deal makers, not folks who love to run businesses. It was clear to my advisors (and me) that they would eventually look for a buyer. Therefore, I accepted stock options as part of the sales price. They had no value at the time of the sale in 2001, but when the company that acquired mine sold to another company in 2007, the value I received from the exercise of the stock options was almost 10 percent of the entire deal. So, stock or stock options can be an excellent offer, depending on the company making the offer.
Earnout. An earnout, or a limited earnout with some cash up front, is usually the worst deal for the seller. As the name implies, the price for your company is partly dependent on your earning it by staying on board and hitting minimum performance criteria. A deal like this can make sense for the seller if there is a significant amount of up-front cash, and the seller realistically believes he or she can hit the financial criteria. A situation like this often comes up when there is an impasse on the price. For example, the buyer is adamant that he is willing to pay no more than $5 million and you, the seller, are equally adamant that you want $8 million. Assume that the buyer’s offer is not far off based on actual performance of the business in the past. By including a $3 million earnout based on objective financial goals, the buyer is protected because if you don’t hit the goals, you don’t get paid. And you are taken care of if you have been realistic and are able to hit the goals. An earnout agreement can often close a deal that has stalled.
Employment agreement. It’s very common for a buyer to want you to stay aboard for some time to ease the transition, to answer questions, and to show the new owner how the business works. In any given deal, depending on what your personal efforts brought to the business, the buyer may want you to stay on as the head of the company, which will now be a division of the acquiring company. In effect, you will have cashed out but still remain as the CEO with a handsome salary. It’s impossible to cover the rainbow of possibilities that cover your involvement in what was once your business.
After the Deal is Done
If you stay with the business in any capacity, you will suddenly find yourself in a strange place. It might be the same building you formerly occupied and you might sit in your same office, but you are no longer the boss. You might be the titular head of the new division, but you suddenly find that you are no longer the one calling the shots. The success or failure of the acquiring company’s relationship with you and the employees is almost totally dependent on attitude, theirs and yours. The new owner is certainly entitled to have things run its way—it’s their company. But how the new managers manage you can make or break the success of the company. Are you a team player willing to separate your former ownership from your feelings about your former position? Can you be open to new ideas, including practices and technology, from the buyer? If you find that you hate the new regime, and want out, your contract should have a clause enabling you to do so. But, of course, you will forego your salary. If the salary is substantial, and you don’t want to give it up, your only option is to make the best of the situation and soldier on.
The most important thing is this: You’ve cashed out. You’ve turned the business that you grew into a liquid asset. If you have worked your business plan and have used the APT Principle to keep you on track, you now have the ability to look forward and do some more planning. The big difference is that now the fun part of planning takes front stage. It’s time to smell the roses, or maybe take up archaeology.
Russ Moran, who wrote this article, is the author of The APT Principle:The Business Plan That You Carry in Your Head, to be published in June 2012.