Companies aren't bought, they're sold: 6 steps to get a business ready for sale
Courtesy / Marshall Communications
Ann Leamon, left, and Nancy Marshall
Years ago, a well-known venture capital firm was discussing its response to the fallout from the NASDAQ crash. An investor commented, “But no one’s buying companies these days.” A senior partner snapped, “Companies aren’t bought, they’re sold. If I’m on the board of a pre-revenue startup, there’s a ‘for sale’ sign on the front lawn.”
Many of you may have resolved to sell your companies in the new year.
With 80% of Maine businesses family owned and Maine’s median age the highest in the nation, that’s a lot of companies to be sold soon. And the old country western lyric of “take this job and shove it” doesn’t apply when you own the operation. Ann has advised several founders, including her husband, on selling their companies.
She’s also written a textbook chapter about the topic and sat in on investor meetings discussing it. Here’s her advice:
- Start before you think you need to. Selling a company takes time. You’re dealing with a big, illiquid asset that may require some work to prepare, and the pool of potential buyers is not readily available.
- Clean it up. There are, we know, different ways to do accounting — and a major point of difference is maximizing profits or minimizing taxes. As a business owner, you’ve likely been minimizing the tax burden. But getting the best sale price requires showing the company’s profitability and potential. Ensure that you’ve rigorously split out the personal and business expenses — pay your family cellphone bills and the garage rental for your car collection from your personal account. Consider drawing up growth initiatives to provide potential purchasers with ideas about growth opportunities. Some sellers end up so excited about these strategies that they decide to keep the company. Others are eager to see the company progress under different management.
- Understand your BATNA (Best Alternative to a Negotiated Agreement). Identify yours and what it will cost you. If you can’t sell the business, you might close it down and auction off the equipment — but be sure to assess the costs of the auction against any gains. Will you incur any workforce compensation costs? Think this through carefully. It will help you define your negotiating position.
- Consult experts. Along with your accountant, you may want to check with a labor lawyer to ensure compliance with those laws. Depending on your industry, you may need to identify any possible liabilities that may need to be addressed or at least acknowledged.
- Find a buyer. There are, of course, business brokers that will list and represent your business, typically charging between 10% and 20% of the total sale price, usually split between the buyer and seller. But in many cases — whether the company is venture-backed or family-owned — a buyer emerges from the seller’s network. A customer may purchase its supplier to integrate its operations vertically. A company operating in an adjacent field may want to expand its offerings (a manufacturer of classroom chairs may want to offer desks). As Nancy says, “Everyone knows someone.” Cast a broad net: Ann knows of a company whose acquisition occurred through a meeting at a neighborhood dinner party.
- Negotiate. Once you have a potential buyer, you need to reach agreement on a number of elements. What’s a reasonable price? Depending on your industry, prices may be determined as multiples of revenue; earnings before interest, taxes, depreciation and amortization (EBITDA); run rate; or other metrics. But dollars aren’t the only currency under discussion. Many acquirers want the former CEO to stay on for a year to manage the transition. Would you be willing to do so? What would you need for compensation? Will you take less money for a shorter commitment? The founder of a small manufacturer wanted his employees to keep their jobs after an acquisition and was willing to manage the merged entity for a year to facilitate the integration. Part of the price may be connected to achieving certain milestones — customer counts, profitability, or revenue levels. This deal structure helps the buyer and seller define and protect their own positions — milestone payments can bridge the seller’s faith in the company’s prospects and the buyer’s concern about over-enthusiasm.
There are few firm rules. You as the seller must be clear on your priorities. But you must also help the buyer understand the nuances of the business, the product, the customers, and the sales cycle. When possible, be willing to adjust terms to help the buyer experience just how great this company is. Keep your eyes on the prize.
Remember, you never get everything. After Ann sold her own company, a venture-capitalist friend told her: “To get a deal done, I’ve always left money on the table.”
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