5 alternatives to relying on luck to sell your business

Patrick Ring, Contributing Writer

As a business owner, you can take the luck out of selling your company by planning ahead. It can take two to three years to prepare your business to be attractive to the market. Here’s why you should get started today.

In 2012, two brothers began discussing the sale of their business with a key employee. He was young, but claimed to have an equity backer. After a year of negotiations, he admitted that he had no cash and that his equity backer (if real) had withdrawn. The young employee left the company six months later – perhaps looking for another opportunity to buy.

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IMAGE PROVIDED BY GETTY IMAGES (WINTERLING)

In their 70s and running out of energy, where were the brothers to turn? They sought advice and soon discovered they were relying on finding (and closing) a needle in a haystack.

They had not planned ahead to create attractive options for themselves as owners of an investment. Their business had always been steady, and they never really tried to grow it. They didn’t reinvest the annual cash flow that their business generated. It became apparent that the lack of growth hurt the market value of their business.

Premium valuations are paid for businesses with a record of, and expectation of, growing cash flows. Finding a buyer on their own to pay an acceptable price and retain all (or even many) of the employees was improbable.

To structure a deal with key employees is a fine idea – one that typically allows the company to continue in operation. However, they can be hard to find. Many key employees don’t have the personal equity capital required to buy a business. Most often, they barely have enough to make a serious dent on a down payment. Sweat equity doesn’t fund an owner’s retirement. 100 percent seller financing is usually a last resort before liquidation.

Here are five alternatives to relying on luck-based planning to sell your business:

1. Get valuation and market input to understand where you stand and what your reasonable options are.

2. Negotiate with the “equity backer” directly and not just the key employee. Does the backer have the capacity to close a transaction? If not, then save your breath (and your confidential information). Finding multiple interested parties creates competition that will improve price and structure.

3. If the employees are an option, find out if they are truly prepared to be owners and to take on responsibility and liability. If so, agree upon a price and a date to become effective. They’ll have to build up a fund for a down payment (i.e. through salary reduction, bonuses tied to achieving growth targets, etc.)

4. If the business is large enough, consider an Employee Stock Ownership Plan (ESOP) to purchase 30 percent or more of the stock. There are tax incentives for the seller, and it represents an attractive retirement plan for current and future employees. However, it demands rigorous formality (the Department of Labor is the interested party here) and some substantial costs.

5. Prepare the business (and the owners) for the transition. Retain an business broker to take the company to market. For the fees that the business broker may charge, the seller is more likely to end up with a 20+ percent better price and a deal that closes. Remember that growth will attract investors and a premium price.

In the end, these brothers beat the odds. They were introduced to a strategic buyer nearby who bought the assets in a cash deal. Their employees will stay in place. The deal was done quietly, quickly, and without substantial expense. Not everyone is as fortunate as they were.

As a business owner, transition will come, one way or another. Don’t leave your legacy to chance.  

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Negotiation Tips for Buying a Business

Like many major purchases, buying a business relies upon some serious negotiation skills. Buyers and sellers must reach an agreement when it comes to various purchase aspects of the prospective deal, including price. While the negotiation process may differ depending upon the type of business in question, that process still requires excellent negotiating skills to obtain a desirable outcome. The following tips can help you ramp up your negotiating skills and support you in your quest to obtain a great purchase deal.

Get to Know the Market

Before entering into any business negotiations, it’s important to research the market for the type of business in question. Get to know the market fluctuations that have surrounded the business’s industry. You’ll need to rely upon these fluctuations when you nail down your price. Moreover, get to know what similar businesses have sold for and any other pertinent information you can find out about this type of business and current market valuations.

Work with a Broker

Sure you can go it alone, but why would you when you can have business-buying expertise at your side? Business brokers specialize in matching buyers and sellers. You want a phenomenal deal and brokers contribute by helping you find viable deals that are in your budget range and match your interests. Moreover, brokers have specialty expertise, as they are involved with a vast array of business sales. They can support you with advice and answer your questions as you navigate the buying process. For example, a broker will be able to use their “experience comparing prices across a specific industry in a specific region. Thus, they can determine if the asking price of a seller is a good one or if they’re attempting to take you for a ride.” (Source)

Learn What’s Driving the Seller

It definitely helps a buyer to understand why the seller is putting their business on the market. Does the buyer need to make a quick sale? If so, the buyer might be willing to accept a lower offer than if that buyer had all the time in the world to wait for the optimum offer. Providing background information about the nature of the sale is where the broker can help you as you plan your negotiation strategy. Your broker may know if the seller is looking to retire right away or just testing the market waters.

Follow a Due Diligence Checklist

Lets face it: buying a business is a huge gamble. The buyer must make a major financial commitment to purchase a business that has just as much a chance of failing as it does succeeding. That being said, buyers must do their extensive research before signing on the dotted line, making sure that they are fully aware of every aspect of the business. This is where the due diligence checklist becomes powerful tool. The due diligence checklist is a comprehensive guide for collecting every single pertinent document necessary, including everything from information of the structure of the company to leasing agreements regarding equipment. By acquiring all the necessary documents, the buyer will be in the best position to determine if the business is worth the financial risk. (Example)

*Note: The sample checklist referenced in the paragraph above is meant to act as a general example. All checklists should be specifically tailored to the business in question

The more you can find out about the business through your broker the better opportunity you’ll have to negotiate well. By brushing up on your negotiating skills and supporting them with these tips, you’ll enhance your chances of securing a great deal.

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by Tracy Watson