Asking the Right Questions to Avoid the Wrong Surprises

FORMULATING THE RIGHT TIME TO SELL, TO MAXIMIZE A BUSINESS’S SALE PRICE  

There are many questions that come to mind when an entrepreneur begins to consider selling their business. Chief among them: ‘when should I sell?,’ and ‘how much is my business worth?.’ But beyond the obvious questions are those they may be less aware of considering. Rather than asking ‘when can I retire?’ or ‘am I ready to sell?,’ perhaps more apt questions are ‘am I prepared to go through the sale process?,’ and ‘is my business ready to be sold?’.

The majority of business owners approach their advisors the moment they are ready to sell. In actuality, a better time to approach one’s advisor about the sale process is at least a year or two before wanting to hand over the keys. Why? Having strong revenue and earnings is not the only thing required to put a business up for sale, as many may assume. There are several areas that need attention in order to prime the business for a sale. Preparing these areas can take time. A transaction can also be a complicated and intricate process – and even the outwardly most straightforward deals may uncover some surprises for the business owner.

TIMING, TOUGH QUESTIONS, AND TACKLING ISSUES    

Regardless of whether it’s an older business owner seeking a liquidity event to retire or it’s a younger business owner looking to sell a portion of the business to bring on a strategic partner and capitalize on their expertise and resources, the buyer – especially one looking to acquire the business entirely – is going to evaluate much more than just past performance and financials. The role of a good advisor is to prepare the business owner for the sale process and all that it entails. But that’s not to say that business owners aren’t surprised by what can be uncovered. There are four common situations where this may be the case:

1. The owner’s role in the transaction process:

One of the more unexpected aspects of a transaction is the level of compulsory owner involvement. Owners typically think they need to be involved at every step. However, a good advisor is there to manage the process so that the business owner can focus on business continuity and maintaining its level of attractiveness to potential buyers. Buyers could shy away from closing a transaction if management starts to take their eye off the ball and business results decline; or if the business doesn’t react quickly enough to new market conditions because the owner is otherwise occupied. It’s crucial that the owner and managers continue to perform ‘business as usual,’ throughout a sale process for certainty of closing.

2. Unforeseen events unfolding:

Even seemingly minor details tend to arise throughout a transaction that could upend a deal. Regulatory approvals or consents from certain customers and suppliers with contractual agreements may be required and could be difficult and time consuming to attain. Property and municipality issues may also be uncovered if land or a building is involved in the sale. Determining who is liable for cleaning up an environmental issue, discovering a claim on property, or navigating an on-going lawsuit from a disgruntled employee – all are potential issues that may seem insignificant, but could derail or delay a sale.

3. Managing multiple owners:

Another challenge often presented is when multiple owners are involved. Even if all are onboard at the beginning, sentiments can change throughout deal negotiations. One dissenting owner could disrupt a sale. Clear communication on personal and corporate goals through a transaction and transparency throughout the process will help mitigate a surprise such as this.

4. Challenging the timing:

There are times when a good advisor may question the owner’s intent to sell. Perhaps if the company is continuing its rapid growth or has just secured a new customer contract, the impetus to sell may be there, but it might not make sound financial sense to do so at that given time. If waiting a couple more years generates more earnings, resulting in a higher company value, that could garner a higher sale price. On the contrary, if personal or family goals require a liquidity event or diversification from the business it is important to align these with the long-term plan for the company and consider whether, despite other factors, timing is right to sell.

ARE YOU PREPARED FOR A NEW ROLE?  

Business owners are also often surprised when they hear the new buyer doesn’t want them to walk away from the company entirely on day one. Oftentimes, the one who built the company has all the institutional knowledge and key relationships, and having that leave right away would do a disservice to the business and its value. If the owner has transferred these key relationships (i.e., customers, suppliers, etc.) and institutional knowledge over time to others in the company then a buyer may not require a significant role post-sale. Otherwise, buyers may ask the entrepreneur to stay with the business post-sale, just in a different capacity, sometimes offering the owner the ability to retain minority ownership. Agreeing to do so may ultimately result in higher sale proceeds.

This can be a difficult concept for some, as many owners never envision themselves working for someone else, especially when it comes to the company they have built. But the benefits of such a role can be many for the owner: such a role may be less stressful because the owner is no longer the one in charge of everything. It’s a different pace handling a narrower scope of responsibilities when other aspects of managing the business are removed. If generating as much proceeds from a sale is desired, sometimes it means retaining minority ownership, taking on a new role, continuing to grow the business, and participating in a future outright sale with the new ownership. This is another reason starting the sale years before retirement is important: starting earlier means having those years of energy left to work, which can maximize the proceeds you can generate from a sale of the business.

This shift in roles can be an emotional side of the transaction that owners also don’t often anticipate. However, practically speaking, it might not be as stressful and might even be an enjoyable way to cap what was a fulfilling career – a pleasant surprise resulting from the transaction.