How to Sell Your Business
By Alex Wilson
Smashwords Edition
Copyright 2010 Alex Wilson
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HOW TO SELL YOUR BUSINESS
This is an overview of important issues related to selling a business, particularly a small, family, mid-market business. Large businesses turn the matter over to investment bankers or in-house legal departments but middle class business owners normally need to spare the expense of a professional team but can deal well with most of these issues. If the sale of your business is ‘someday’ or ‘later’, apply these tips to prepare your company to be in ‘salable shape’ when the need/desire for the sale is imminent.
WHAT DO BUYERS NEED?
As in many of life's situations, it is helpful to put ourselves in the other person's shoes. This works for a business owner addressing how to prepare his/her company for sale. Put another way, if I were the buyer considering the purchase of my company, what would I want to know?
First and foremost, you would want to feel the information has credibility. Credibility is gained in various ways, from having believable financials to the more 'squishy' issue of trust in the word of the seller. Credibility for financials does not necessarily need to come from five years of audited books but certainly it would be enhanced by the seller having a competent CPA and providing open access to that CPA. Also, as virtually all private company owners extract their compensation in a myriad of ways beyond taxable salary, a full and complete review of those 'owner discretionary expenses' is important and is rarely viewed with any sort of stigma.
A buyer wants a 'clean' company without threatening or overhanging issues: pending lawsuits, tax problems, environmental problems. A seller must make every effort to conclude and clean up any of these problems. The buyer will undoubtedly require that all 'contingent liabilities' be assumed by the seller and the buyer's lawyer will require a legal document to absolve the buyer of these problems. Nonetheless, just having them as part of the discussions about the company is a downer for a buyer and will devalue your company. Best they be resolved before the sale process is undertaken.
Corny as it may sound, the buyer wants to find some 'romance', some excitement in the company 'story'. Not only do they want to know precisely what the company does, who it serves, the competitive 'positioning', etc., they want to know where the company has been and where it may be headed. They want some exciting possibilities for the future. Most times the buyer has his/her own ideas but they can be enhanced by open discussion of roads not taken, opportunities not yet exploited, emerging openings, the synergies possible by merging/collaborating/joint venturing, etc., etc. They want to see a vision of a growth arc that their ownership might realize.
Now, on the subject of pricing, most private companies are sold on a multiple of 'adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)' (a clean and clear picture of the true free cash flow, the money the company provides to pay debt service, provide growth capital, reward the buyer). Those multiples normally range from 2 to 6 times the ‘Adjusted EBITDA’. In other words, if the company has an Adjusted EBITDA of, say, $1 mil., the selling price could be somewhere between $2 mil to $6 mil. A key question is, what causes a company to be worth $2 mil or $6 mil? The lowest multiple is assigned to a company with no discernable protecttion of earnings. It is easy entry, sells commodity products, and has no loyal or contractual client base. The highest multiple is earned by companies with protected earnings streams; intellectual property (patents, etc.), unique products, a solid brand, exclusive distribution rights, a loyal or contractual client base. As a seller, you should see if there is anything that could enhance your products/brand/client contracts that would help show the buyer a reasonable expectation of ongoing earning. Confidence in ongoing earnings relates, also, to an ongoing operations team; those who make the company tick and will NOT be leaving when the company is sold.
The reciprocal of the above would be a company the success of which is solely dependent on the exiting owner. Oye!
Summary: A buyer candidate for your company would like to gain a clear vision of where the company has come from, where it is now, where it could go. The buyer candidate wants to see financials with credibility. The buyer wants freedom from worry about hidden 'bear traps' of contingent liabilities (law suits, etc.). Except for buyers who want 'troubled' companies to buy on the cheap, they want a viable reason for the owner to sell. The buyer wants to have confidence that the sale will not end the viability of the company through the exodus of key staff. They want a company that is OK now and can be made even better.