Top 10 Owner Concerns When Selling a Business

With 2020 in the rearview mirror, 2021 appears to be the year of possibilities.  You are probably looking for options and selling your business might be one of those options, however, there are some things you should consider before doing so.  Over A Neumann & Associates’ 18-year history we’ve seen and heard a lot while navigating individuals like yourself through what can be one of the biggest decisions of your life. Below, we will discuss the top 10 owner concerns when selling a business.

#1.  Revenue is down, but I think my company has growth potential.

Maybe 2020 treated you much like most companies and you had less than stellar revenue.   No one will acquire a company for its current performance, but all buyers want to see that a company has growth potential.  Thus, it is absolutely essential that a seller steps back and thoroughly defines all potential growth paths for the company, including the underlying capital infusion required to execute such growth plan.

Rest assured, every business has growth potential. Naturally, the current business owner – most familiar with the business – is the most qualified individual to provide guidance for such growth, but sometimes said owner is tired after all the years of running the business and it might take an external consultant or business coach to help define such growth – geographical expansion by opening offices in new regions, synergistic product or service line expansions either by way of organic growth or by acquisitions, the bolstering of human resources by hiring additional personnel – just to name a few. Money well spent!

#2.  How long will it take to sell my business?

While it varies greatly from one transaction to the next, the typical selling time for a small retail or service business ranges from four to eight months. For a larger business, a six- to twelve-month time frame is more common.  However, selling a business is a full-time job in its own right, and for that reason, we always suggest hiring an external advisor as opposed to “doing it yourself”.  Well-experienced advisors indeed know that a 8–12-month time line for a business sale can be detrimental to the business’ performance if not handled externally.

Thus, the best advisors urge owners to maintain their business’ performance – freeing up the owner’s time by navigating through the ins and outs of the sale. This includes a lot of “after hours” meetings addressing that most owners work around the clock.

#3.  I’m not a salesperson, how do I even market my company?

The market for ‘companies for sale’ is very competitive, to say the least. There are thousands of companies for sale at any given time, there is great ‘market transparency’ with the Internet and with the impending demographic shift, there will be many more ‘baby boomers’ to sell a business than to buy a business. Worse, the subsequent generations have been exhibiting a significant degree of ‘risk adversity’ in running – and acquiring – a business.  Not to mention the Covid effect has everyone questioning next steps.

The implication is that investors will demand concise, convincing information to explore an acquisition. The most critical marketing documents in this process are the Blind Profile, Confidential Memorandum (CM), and an accredited business valuation by a third party.

The blind profile should give an approximate synopsis of the key metrics of the company – assets, employment, cash flow – but should not divulge the company name, specific operation, or address.

The CM – to be obtained by the investor after pre-qualification – should include a detailed asset listing, tax-return-based financial information, growth projections and current and projected EBITDA with normalized Sellers Discretionary Cash Flow (SDCF) – including an explanation how it was developed. For example, discretionary personal owner expenses being run through a business should be indicated. In addition, the company’s competitive advantage needs to be illustrated, revenue streams explained, company org charts shown and so forth. Essentially, everything an investor needs to ‘make a decision’ should be truthfully disclosed.

In short, the Confidential Memorandum should represent putting ‘the best foot forward’ by the business owner in selling a business. Neglecting such, or simply relying only on a valuation, will significantly reduce the transaction price or jeopardize a sale altogether

#4.  I don’t know where to begin, whom I should work with?

As a business owner, it goes without saying that your primary focus should always be on the performance of the company.  This is never more vital than when selling a company as the most recent performance will be scrutinized most heavily by any potential investor.  Without a professional team in place to properly value and market the sale, the business owner is left with performing both tasks. The usual result is both efforts suffer.

Your team should be made up of a reputable M&A advisor who will coordinate an independent certified business valuation, a qualified CPA/Tax Advisor that has experience in Mergers & Acquisitions, and an Attorney whose focus is on M&A transactions.

One aspect neglected and overseen by many sellers so often, is the selection of good, professional legal support.  As a matter of fact, the most frequent cause for terminated deals is a sell-side attorney who is not familiar with the “ins and outs” and having to “read up on” it.  At best, such situation results in a much-delayed transaction, at worst, both parties will ‘dig in their heels’ and the transaction will fail in the end.

#5.  What happens if my employees find out or even worse, my competition?

It is important that clients, employees, suppliers, landlords and lenders are not aware of the possible sale of the business.  That is why it is important to have the right team in place that will maintain confidentiality throughout the whole process.  Almost without exception, all business owners are concerned with preserving confidentiality throughout a sale transaction, violating such can have significant negative impact.

A good M&A advisor will have the proper security measures in place – not only starting with a fourfold investor pre-qualification process, but also to provide information to an investor as the investor shows increasing interest and motivation to execute a deal.  For that matter, the advisor prepares a blind profile, sometimes called a teaser, outlining the generalities of the transaction, market place, and business.

The knowledge about a pending business sale has an impact on vendors, employees, banks, landlords and most importantly, customers. Generally, no individual likes change – the fear of the ‘unknown’. In the case of a business sale, however, this can have a significant negative economic impact.

Specifically, vendors will be concerned about receiving payments, employees fear lay-offs, and banks are concerned about the servicing of loans. Most importantly, customers will start to invite competitors to bid on their business in order to secure product/service sourcing in the future. Worse yet, the longer the time span between a breach of confidentiality and a deal closing, the worse the impact will be from any one of the stakeholders above – with a direct impact on the performance of the business and deal value.

Thus, one key objective of the marketing documents—in particular, the blind profile, is to maintain confidentiality with respect to the sale of the business, preventing stakeholders from learning about the sale.

#6.  It’s going to be a rough process.

Business owners are usually industry experts – highly competent in the day-to-day operations of their business. Selling a business is a completely different transaction – one in which business owners are not familiar with.

Generally speaking, most business owners feel intense anxiety during the sale process, particularly during periods of uncertainty or conflict. Every deal comes with a unique set of challenges.  A good M&A advisor does not expect a business owner to be an expert, but he/she will navigate the owner through the deal process. Being proactive, a good advisor can reassure a seller during these uncertain times.

Such re-assurance prevents a loss of momentum that ultimately can kill deals. Buyers sense uncertainty on the sell-side and are inclined to lose interest in a deal in such a scenario – often interpreting such uncertainty as lack of motivation on the sell-side.  Good M&A advisors can put a stop to this process before it spirals out of control by instilling confidence and ensuring the deal is appealing and efficient to all parties.

#7.   I haven’t been planning to sell, is it still possible?

Long-term planning is key to any successful business sale. By keeping updated records, a detailed business history and sales portfolio on hand at all times, it will make your planning pay off. You just never know when that perfect buyer may walk into your business and make you an offer you just can’t refuse.

Insufficient financials don’t necessarily have to prevent a business owner from selling a business or to accept a lower business valuation or transaction price. A good advisor will give sellers an early heads-up as to what needs to be improved in the financial reporting system. Often this can be accomplished with rather small adjustments.

Business owners and advisors need to honestly discuss such deficiencies, remedies and how it will impact the anticipated business valuation. A seller needs to understand the need for an immediate, consistent, and correct financial reporting system as it will surely be requested from potential buyers

And whereas a proper valuation on the front end is very important, tax planning on the back end is just as important. It does a seller little good to have obtained one hundred percent of the asking price, only then to turn 50% of such over to the IRS or State government.

#8.  What type of deal is best for me?

Deal structure is very important with respect to valuation and tax planning. More importantly, often sellers rush to the highest bidder.  However, price is most likely less important than deal structure: for example, is A/R and A/P included? How will employee retirement obligations be treated? What assets secure the seller note? On what basis are royalties calculated, and what audit mechanism is in place? What kind of consulting and employment agreements will be put into place for the seller? Will SBA bank acquisition financing allow for a seller note pay-back?

A trusted M&A advisor can help you walk through each of these scenarios to decide which type of deal best fits your needs.

#9.  Am I asking enough or too much; I put everything I had in to this company?

Setting a too-high or unrealistic price tag on a business can lead to a dead-end street. Expecting to get top dollar for a business that generates little or no profit is simply using bad business sense and jeopardizes confidentiality. Consider your industry, similar businesses, the economy and your marketplace when pricing your business to sell.

Another mistake is to price the business too low. Often business owners will price their business low because they are burned out, suffer from an illness or did not get good advice. Do research about other business sales before jumping in with both feet.

When working with a good M&A advisor they’ll be able to determine an accurate price point by way of an accredited, third party valuation firm.

#10.  Is this the right buyer, I still want my employees and customers taken care of?

Taking the first offer may not necessarily be your BEST offer. Selling your business for top dollar with little or no money down along with an extended contract may lead you to lose it all due to a bad deal structure.

Evaluate your options and make the best selection for the long term. Ask yourself, is this the best person to buy and run my business? Or, can they quickly connect with my customer base and learn how to market effectively? When the business sale goes as planned, it creates a tremendous opportunity for both business owners and the success continues.

When working with a qualified M&A advisor, they prequalify all buyers to make sure they are a good fit for the purchase and have your best interests, as well as the interests of the company aligned.