Preparing your Business for Sale, part 3
Updated: Jun 12
This is summarized from a podcast featuring Lamar Rutherford from Excellens Solutions with David King.
What if you need to sell now? We are seeing more business owners interested in selling right away. Some are concerned they'll miss this window where there's a lot of cash available and there's still money out there.
I think the real estate market is seeing the impact of a slowdown faster, and that comes from a comment from one seller who wants to sell his real estate. A month ago, he was getting all kinds of interest, but the interest has slowed down. I haven't seen buyers fall off yet. There’s still a lot of interest, but everyone is getting a little more concerned.
I have seen some buyers who are in an industry where inflation is already hurting their bottom line. The interest rates are changing. They’re deciding how a purchase is going to pencil out.
For a buyer, it's a huge decision, especially when preparing your business for sale. They may be leaving something else or could be growing something they've already got. They’re thinking, “Can I take that risk right now?”
But if there's a little more risk right now, then there's also reward to it. There are some people eager to pursue an opportunity now in case things get worse. But there are others who prefer to wait until the situation is more stable. But, of course, uncertainty never goes away.
I do think we'll see a fall off. Funding is getting more expensive.
Not all buyers are the same There are different categories of buyers. They differ in how they look at things. When the economy's changing, some buyers are more risk averse – but some are less.
For the individual buyer, some are worried about losing their current job and are more interested in buying something. They're typically the smaller transactions. The SBA-only loans up to 5 million. Sometimes, these buyers can get family funding or have people behind them to invest, but generally individuals are for the smaller, under $5M purchases.
The next level is the financial advisor, which is the private equity or family office buyer. They're really looking for a financial return. They may have an industry expertise, but generally, they're about the numbers. They often want the owner to stay and work in the business for two – five years. They provide funds to help the business grow and get to the next level. I would expect that audience to start to retract a little. They've been cash flush and have had to try and find things to get a return. I think they're still sitting on money they need to get invested – so there's still money to come off the sidelines.
If you're in a spot where private equity buyers might come in, I think there's still opportunity.
If you're looking to a serial entrepreneur to come on board, you've got a different situation.
The strategic buyer is the one either in your industry or in your chain, whether it's suppliers or even customers sometimes.
They can be the highest value buyer, because they have distribution or some other way to leverage what you've done or the assets you have, and blow it up. For example, Nestle buys a smaller beverage company. They have a distribution chain, they can increase the volume overnight or pretty rapidly. That's the highest value strategic buyer.
Sometimes a strategic buyer is in your industry. I had a plumber who is an example. The buyer, another plumbing compamy, already had their own brand name. They already had their own expertise. They're basically just buying the customers. In that case, they're not the highest bidder.
The strategic buyers are still looking for growth opportunities, but they're the ones that will get a little more nervous about the markets shifting. And they're also the ones struggling the most from the supply chain issues.
Avoid these common mistakes during the business sale process I think the biggest mistakes occur with advisors. Sellers might use an attorney that maybe they've used for 20 years and has been fabulous as a corporate attorney. But that attorney doesn’t know M and A (Mergers and Acquisitions) transactions.
I find the higher quality M and A transaction attorneys might charge a higher hourly rate, but they're so much more efficient. It pays off in the long run, and they're much better about knowing how to make a deal work.
Ultimately, it's not about protecting the owner from every potential risk -- it's about how to protect them from risks in a reasonable way so that the deal can get done. The risks should be minimized, but there’s often a trade-off.
If you've got an attorney who's incapable of helping you close the sale, you're paying for something that's counterproductive.
Your CPA may be a great family friend. who's been perfect for preparing tax returns all these years. Do they know much about M and A? Will they be honest with you and say, you need somebody who's more seasoned in transactions that can help you save money on this?
I've had clients where one attorney is good and the other one is bad. They end up in these circles just spending too much time and money.
The second biggest mistake occurs when owners are too proud When you’re talking about your contribution to the business as an owner, there's a pride in what you've built -- and you should be very proud of that,.
It's a huge effort, and you've created a whole ecosystem around employees and customers – you’ve built a community with your business.
I believe in keeping that legacy alive. That's a very important part of it to me. But the mistake owners can make is they can be too proud. They talk about how much their contribution matters, and that can undermine the value of the business.
If the business is so dependent on the owner, what happens when there’s a new owner? When the buyer buys it and the previous owner goes away, there goes the value.
So, make sure that you talk about how you've built it, but don't talk about how it's so dependent on you.
View the entire podcast at: https://youtu.be/HlpO3qS0opc