Top 3 Owner Concerns When Selling a Business

If you are thinking about selling your business, you certainly have many things to think about.  The process of selling a privately held company is a unique experience and, if handled properly, can result in an extremely rewarding transaction that fully meets the goals of the owner and the firm.  Thoughtful planning and a proactive approach will result in an efficient sale of the business on your terms – a transaction that quickly maximizes financial return with the correct buyer in a professional and confidential manner.

As Achim Neumann, President of A Neumann & Associates, LLC. and one of the foremost respected M&A advisors on the East coast, says in his 2017 book entitled The Road Beyond – What Nobody Tells You About Selling a Midsized Business, “Whatever the ultimate motivation or timing is for the sale, what is most important is setting the planning into motion with as much lead time as possible – ideally, at least three to five years before the planned transaction time.  Within this context, a business owner will have many questions regarding preparation for the sale. These questions are essential to the owner’s ‘peace of mind’ thus determining, if he or she is ready to sell and motivated to commit to the process.”

OK, so what are the biggest questions that need to be addressed for business owners?   From many years of experience, it all comes down to “Three Big C’s” – Cash, Confidentiality and Continuity.  Let’s dive a little deeper into the 3 most prevalent concerns that business owners typically have as it relates to a potential sale:

1. CASH – What is my business truly worth and how much cash will we receive at closing? – This is priority #1 for most business owners. In order to be comfortable with a sale, it is imperative that a clear deal structure be defined and supported before going into the market.  As a first step, a  proper accredited fair-market valuation should be performed and delivered to the business owner. The valuation should accurately identify sellers discretionary cash flow (or the true benefit of ownership on an annual basis) as well as the assets included in a sale. Based upon current market factors, the financial performance of the firm, and specific growth potential, an accurate value can be determined.

As part of the valuation, it is critical to have a formal company marketability assessment provided with it. This review will outline both the positive and negative operational factors that drive value and impact the relative attractiveness in the market from a buyer’s perspective. Items such as owner dependency, client concentration, managerial depth, financial record-keeping, recurring revenue, and potential growth opportunities all impact the marketability of a firm in the buyer’s eye. Bottom line is this – the stronger your firm is going into the market, the more cash you will receive at closing (as opposed to deferred dollars) and the stronger overall transaction can be attained.

The combination of a proper valuation and marketability review will directly influence what a final deal will look like – you need to know exactly how much cash will be delivered at closing and how much will be deferred in either seller note or performance-based scenario.  Once the details of a potential sale are defined, you need to see if that transaction will meet your goals – both financially and from a lifestyle perspective. The financial proceeds of a sale can be inserted into a financial plan and reviewed to see if cash flow will be sufficient for retirement or change of career.

2. CONFIDENTIALITY – What is the process to discretely sell my business and meet my goals? – Unlike selling real estate where everything is out in the open and publicly marketed, the sale of a business should be completed in complete secrecy as best as possible. The last thing that business owners want is for key management, employees, competitors, or suppliers to find out that the company is for sale.  There is no need for them to know the intentions and suffer unnecessary anxiety about a possible change at the top. If done properly, an efficient sale can be executed without any breaches of confidentiality.

There is certainly a correct way and an incorrect way to sell a business and it is essential to collaborate with the proper advisors to implement the sale.  Professional marketing documents, access to the correct buyers, stringent buyer prequalification, expert negotiation skills, accurate financial reporting, and a thoroughly managed approach are all pillars of a successful and discreet transaction process.

3. CONTINUITY – Will employees and customers be adversely affected by selling? – Beyond the financial aspects of a transaction, business owners are rightfully worried about the ultimate fate of key management, employees, and their valuable clients.  Powerful relationships inside and outside of the organization have been built over many years and the last thing an owner wants to do is jeopardize those for any reason.  The key questions that buyers will have to address surround their plans and intentions for the current staff post-closing.  The security of key people and the continuity of operations is a tangible fear of any transaction.

The good news is that most transactions that occur with privately owned companies involve no significant change to the current organization and its key people.  The reasoning is simple – the buyer is spending good money to buy goodwill built up over many years with an organization in place that is performing well and that is going to be required to grow the business into the future.  A proper transition with the current owner and preserving top talent is essential for any new ownership to meet their complete goals – this will certainly be the focus for at least the first 12 months.  The result is that there is very little change to employees, management, and customers coming out of a sale.

As Mr. Neumann adds, “Every business sale transaction is vastly different from what a business owner experiences on a daily basis in managing the business.  A business sale is completely different in its nature and will impose considerable stress on a business owner – even more so if the preparation was insufficient and the team involved inexperienced.”

Preparing for and deciding to sell a family or privately held business is a weighty exercise that calls for a thoughtful and proactive approach.  The execution of an efficient sale as described above is a complicated process that calls for experience, discretion, and professionalism. The legitimate concerns of a seller must be addressed.  Determining the ultimate deal structure with cash at closing defined, preserving confidentiality throughout the process, and maintaining the continuity of the organization are paramount priorities.  Proper preparation and an experienced M&A team will go a long way to alleviating any fears involved with a sale of the business.