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May 25Roger Kohl

Finding the Exit® … we all do eventually, some more successfully than others

May 25Roger Kohl

A business owner (we’re been friends since the Johnson administration) asked me about selling his business awhile back.  Obviously we know each other well.  I have no doubt he anticipated a short answer so I distilled it down to the bare minimum.  Knowing him as well as I do I was in a position to gloss over the key assessments of 1) financial preparedness (he’s personally in a pretty good position, the business while profitable needs some attention for him to get ‘his number’) and 2) emotional preparedness (there’s a ways to go).

So I asked the two part question I’ve posed countless times before, “What options have you considered, what are your goals?” and not surprisingly I got the same (only the amount differs) one part answer as every other time I’ve asked an owner looking to sell, “I want $___.”  Every single owner had a number at the tip of their tongue, not one responded to what options they had considered.  And then we got started on the process and whether “the number” was even in the ballpark.

A bit of background

Somewhere in the neighborhood of 8 – 10 million U.S baby boomer owned small businesses will come to market in the next dozen or so years.   It’s a buyer’s market.  In my experience you get one chance (occasionally, very occasionally more) to get it right.  Historically 1) half or more of small businesses that have sold don’t have a strategic plan in place to sell their business or 2) minimize capital gain or estate taxes.  If you don’t have a plan on either you’re not likely to be happy with your deal if you even find one … if you don’t have a plan on the latter to minimize taxes I’m more than reasonably certain Uncle Sam has a plan for you that I don’t think you’ll think is so swell.  Each are reasons why many experts predict that only 20% give or take will successfully exit what’s likely to be the largest financial event (at least hopefully) of their lives.  How will you stand out and be one of fortunate 1 in 5 and achieve your goal?

Explore all your options – at the end of the day there are really only 5 options available to small business owners (I’ve eliminated an IPO that’s typically not an option to most SMBs and liquidation on the assumption that you actually would like a shot at being one of the 1 in 5):

  • Sale
  • Private Equity Recapitalization
  • Management Buyout
  • ESOP
  • Gift

Having options or competing buyers is a great position to be in.

Have realistic expectations, most companies have historically sold for a multiple of EBITDA or Discretionary Cash Flow (EBITDA –  Debt)  in the 3-5x range.  Want to be at the high end or perhaps even at a premium?

  • Growth – 99% of buyers will be interested in your growth opportunity.  This is also key to negotiating a premium by demonstrating the growth possibilities, CLEARLY, in terms of:  product extension, new products, wider distribution, better market penetration, marketing & sales strategy, etc.  Have upside!
  • Financial – Be able to identify, document and explain every dime 16 ways to Sunday including all P&L “normalizing” (especially) and Schedule M/Book-to-tax adjustments.  You will feel as if you are going through your year-end audit, an IRS audit, and then some, simultaneously, as you wind your way through to a successful sale.  Get the back office in shape!
  • Management – The buyer will want to know about the capabilities of the current management team and their willingness to stay on board after the deal is consummated.  Have capable management in place – if they’re not and they’re trainable, train them, else find them.
  • Deal Structure – The vast majority of private company sales are asset (not stock) purchases.  This most typically results in a stepped up basis for the buyer and tax implications to the seller.  You must get with your tax advisor to understand and minimize your tax burden including why it may behoove to close a deal by 12/31/12Know the implications – it’s not only getting your number … it’s getting the number you want and keep!

If you want to exit your business start looking at it from the buyer’s perspective with the end goal in mind and eliminate red flags and deal killers that will keep you from getting your price or even selling at all, to mention but a few:

  • Weak sales / No New Products, most products have shelf life, if sales are weak and/or there are no new products on the horizon how are your sales, marketing and product development teams doing?  If it’s a sales effort related perhaps it’s time to look at your sales incentive program, are there new fresh ideas coming from marketing?  Marketing often goes stale long before a product’s shelf life has passed.  If there are no new products on the horizon, why?
  • Individual customers that comprise more than a couple of % points of total sales will dilute the purchase price.  A customer or two that are 15% or so of total sales will likely nix any deal.
  • Numbers, if you can’t support them, your deal is toast.
  • Management team, most buyers don’t want to have to re-tool, rather have competent, effective management in place.  If you haven’t taken any time off in quite some time that may point to management concern and/or where the business is headed without you.
  • What’s the condition of your facilities and equipment?  Long in the tooth is another discount.
  • Human capital, how’s your culture and morale?  More and more I’m seeing buyers bring human capital experts to asses just this. Be careful with promises for after we sell.  If there are issues they will likely come to light and discount or nix a deal.

Successfully exiting your business is a process not an event.  If you want to be one of the fortunate few you will need a plan to prepare for your exit – The GamePlan™ is a proven methodology to lead us there and insure that you are one of the 1 in 5 that achieve your goal.

B2B CFO®

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