EP 27: Can You Sell Your Business in 2020?

Ed Mysogland  0:00  
Welcome to the defenders of business value podcast. I'm your host, Ed MySQL. And I help business owners make sense of business value so that they can sell their companies when they want, how they want and to whom they want. On today's episode is going to be a little bit different. You just have me I'm not interviewing anybody we're going to talk about, can you sell your business in 2020? This is off of a webinar that I did in early February, and it was very well received. And it's always a hot topic this time of year. But I hope you enjoy it. Certainly, if you have questions, or need to talk about the content, just reach out to me at edit defenders of business value. Enjoy the show. Please welcome please welcome welcome. This is another episode of the defenders of business value podcast, a podcast where we talk about what makes a business valuable, learn the tips and tactics to increase your company's value that only veteran dealmakers know. And now here's your host, it miso clamp. Well, good afternoon, and thanks for joining us. My name is Ed Mysogland. I'm the managing partner at Indiana business advisors. And I wanted to welcome all of you that are are joining us today in our second webinar of 2020. And this is about planning the sale of your business. And we know that for most business owners, it is the largest asset that they own. And so the importance of successfully selling the company is important for whatever you plan to do with yourself next. So we take this really seriously. And one of the things that we've been doing is we always believe that prepared business owners make the best clients. And that's why we're going to do this episode of our webinar of planning the sale of your business. So let's just get into it. And we get this question a lot on just what is the process of selling a company and preparing it for for sale? And we thought we would we would revisit this and do a walkthrough of if you plan to use transaction advisor or business broker for for the sale, this is how it works. So let's get into this. So the first thing is Why use a broker?

It's it's funny that one of the questions that came through the registration is about how to tell your employees that you're selling your company. And that segues perfectly as to the utilization of a brokerage. And one of the things that's of utmost paramount, absolutely you have to understand is that this is about confidentiality. The cornerstone of our practice is based on confidentiality. So telling people that your business is for sale is probably the single worst thing that you can do. And the reason is, like if I'm a competitor, and you hear that someone's selling their business, they're not selling their business, they're they're going out of business employees, you know, they watch too many movies. And they see that, you know, someone comes in, buys a company eliminates all the jobs, it doesn't happen at this level. And when I'm talking this level, I'm referring to companies that have revenue of south of, of $20 million. I mean, the the employees make up the value of the company, or at least a big chunk of it. And so to tell them that you're selling the company, and certainly there's a loyalty thing that you have to contend with, but look at the appropriate time you disclose that you're selling the company, but but as far as the sale process, no, you don't it is, it is absolutely the fewer people that know, the better. We and we probably could devote an entire webinar about confidentiality and the harms that it can do. When a breach is made, we'll consider doing that down the road. But for for the person that submitted this question, look, do yourself a favor and keep it as close to you as possible. Okay, so back to using a broker, think of a broker is not emotionally invested in, in your business. When buyers come in and look at your business and through the financials and the decisions you made. I mean, it's easy to get emotionally tied to the business, that person is judging me not necessarily judging the investment that they're making in through the acquisition of your company. So a broker provides that insulation if we're just we're just doing our job. I mean, we're selling an investment not necessarily somebody's life's work, even though it is somebody's life's work. We're just not as emotionally attached to it as you might be. So again, that we serve as that buffer position, we're also able to and this is probably the biggest thing. We have the benefit of It means in the position where we can feel the feedback. And we can help distill what is what is really a challenge to the buyer versus what is just posturing. So we serve in that capacity we're we're again, we're we serve as a buffer that we've been doing this for nearly 40 years and 2100 deals done. So we know what the buyers are, are really asking whether it's in a direct or indirect way. And if you don't think that a buyer is trying to posture in order to extract information from you, you're wrong. So as we move through this process, having somebody in between it'll also legitimizes the process. And when I say legitimizes, the process I'm referring to, if you're just going out and saying we have fielding inquiries, that your business is for sale, people don't necessarily see it, as I'm interested in selling my business. It's more I'm interested in seeing if there's an interest for my business, when we're engaged, we have a motivated, educated seller, and that in the buyers eyes is a real real good thing, because that no one wants to waste time. And buyers these days are coming armed with more and more. When I say armed, are referring to they come with appraisers, they come with their accountant and attorneys. And we'll talk a little bit more about that here shortly. When we're serving this capacity, when we're working with the buyers, we're helping them understand that our client who were advocating maximum value for here's why not necessarily because that we're trying to take advantage of the buyer, we know that we have to make a win win deal for for it to go together. People just don't make as many foolish mistakes as they did 20 years ago, when they didn't have the information. Now, there's an abundance of information. And we when we're sitting and doing our thing, that's what we're we're doing is we're helping everybody understand the risks to both sides, and beneficial transaction together. And then the last thing, and probably the most important things is it takes time to sell a company. And if you're out trying to market your business, and build the inquiries, and and all the things that it takes to sell a company, your business is going to suffer. And I'm going to tell you a lot of the challenges that we that we see our sellers go through and I'm working with a friend now who is coming to us saying I should have engaged you sooner. And the long story short is that in her case, she is going through and working with the buyer and the buyers just keeps elongating the process, and what's happening with the business who's running the business if they're having to work with the buyer. And what ultimately has happened is there's been so much time that the buyer has sucked from the seller, that revenue has gone down. And you can imagine what the buyer is now doing the buyers gonna go turn around and say, You know what, your performance is down, we really need to rethink about this this value. And so from our standpoint, what we do is we say, Look, you operate your business as if you were going to be unsuccessful Period, end of story, you just do it. Do that. And we'll handle everything else. There may be times where we need to to get you involved, but we'll let you know. And it's not as much as frequent as you might think. And so we're building those inquiries, and I can tell you that it takes roughly 25 buyer inquiries to get one genuinely interested, qualified candidate. And so you can imagine and that's just to get one so you you can imagine and I'll we'll talk a little bit about marketing here in a second. But there's a we go through a lot of buyers in order to find the ones that are qualified to work with you. Now if you have an abundance of time, and you know, you want to go through that. I mean, that's that's that's up to you. But I can tell you that it normally does not work out well, because something has to give there's only so there's 168 hours in a week. And you can't run your business effectively as well as work with a bunch of buyers and their demands. So those are the reasons why you you might want to use an intermediary. So we have in our shop, we have a nine step process. And I'll go through each one of these things that every business that comes through here goes through the same process. So let's start with first. First one is planning prepare. Like I indicated earlier, we believe that every business owner that we work with should come to the market, when we put them on the market, that they're educated, that they're prepared, and they understand the process. They understand how the buyer is going to perceive their business. They understand perhaps some tax ramifications, they are going to understand And that, just the process that that they're going to go through in order to sell the business. So how do you do that? So as far as planning and preparation, obviously, we want the financials to be in good presentable order. And when I say that, the biggest challenge that we we bump into is when financials are a mess, and there's so many owner benefits that are embedded. So deep into the financial statements that the buyer then has, has some reservation as far as whether or not the financials are believable, then when you get into a quality of earnings kind of analysis, it's a problem, because the buyer just doesn't literally buy into your tax minimization strategy. So next, we want the site needs to be presentable cleaning it up. Not necessarily, so it's in pristine condition, but so it shows shows well, and here's how the buyer looks at it equipment, especially in a manufacturing facility, if equipment is well maintained, they know that it's going to hold its value. If not, then they're going to penalize someone for they're going to penalize the seller, that they're likely going to have to make capital improvements, because it doesn't appear that the equipment was well maintained. Next inventory. You know, if you have if you have slower, obsolete inventory, get it off the books, and just just move it out, it's, it's better to show.

And again, it's back to risk, the buyer sees it and they're like, Okay, they they have a inventory management system that operates well, as opposed to sitting with slow moving inventory, some of the low cost high yield improvements, again, right above it with the financial records, cleaning up the books is probably the lowest cost highest value that you could do. You clean up your books, you may pay a little bit more in tax, but at the end of the day, the multiple that you receive is going to be higher, and it'll offset any kind of tax implication that you might have. Next, evaluating what does it take for you to transition? And not just financially? I mean, if you transition out of your business, what are you going to do? You need to think about that. And then moving into, you know, what are your post financial needs, believe it or not, that's a that's a big one, because a lot of a lot of business owners need this, the sale in order to have the retirement that they envision. So we have a couple tools. And what we do, and I'll just go here, so our valuation and assessment work that we do. So first, we use what's called pre score, if you think of the deal, and in a pie chart, and the reason people, the deals don't go together, roughly 40% fall apart because of an emotional attachment, or emotional issue related to the business that look, I identify with this business, I've done it for so long, and I can't, I just can't sell it. So what we use pre score for Is It stands for personal readiness to exit. That's what the priest stands for. And that kind of it's a self assessment that we walk you through, you know, here's some of the things you need to be thinking about, as you're as you're moving to, to an exit. And so we want you to be emotionally ready though, when the time comes to sell. You know, we don't want to get down to the 11th hour and have you say, You know what, I don't think I can sell this not not only from a, it doesn't do anybody any good, the buyer is mad the brokers mad. And chances are that the deal that you have won't be better down the road. And so we want you to be emotionally ready to do that. Next we have value builder, I serve on the value builder advisory board. And this is if you can think of it as a tool that helps you see your business through the buyers eyes. So there are eight key drivers of value. And this self assessment talks and delves into each one of them. And so we use it, because we want to see how the buyer is going to perceive it. And even though we intuitively just by by interviewing you and, and working through the financials, we can see some of the challenges, but hearing it from you. And the self assessment really helps us drill down to how the buyer is going to look at it. And then we can make some changes because at this point, you can say look, you know, I'm not certain I'm, I'm ready to do this, I want to grow value. Well, there are some tools that we might be able to help in helping you grow the value. And then the last thing is the business valuation so the value builder assessment in the business valuation go hand in hand, because in business valuation there's something called company A specific risk. And guess what that is? That is the way buyer looks at the business. And and it helps me as an appraiser dig into, okay, how is the buyer? What kind of risk premiums or discounts is the buyer going to make when looking at this? And the big takeaway here, aside from the tools that we use, is with business valuation, it is two things you got to remember, actually three. So the first thing is cashflow. Okay, you have to understand that that valuation is based on the earnings capabilities of the company. Number two, is expectation that buyers make an expectation that that earnings stream is going to stay for quite some time. And then number three risk, so you apply the three together. And that's what determines the value. So that's step two. And again, it's back to we believe that the best client that we work with is educated and understands their business, how we see it how the buyer sees it. Okay, number three, marketing, we compile a bunch of information about your company, and this CBR and CBP, again, back to confidentiality, the confidential business profile, what we call it is a germane, non descriptive document that has enough information about your company for someone to pick up the phone, or drop us an email, or answer one of our ads about the business. And then at that point, we begin the qualification process. But it doesn't say the name of the business doesn't say the location doesn't say anything other than, for example, say a manufacturing company in Indiana, serving the automotive industry revenue of $2 million, with an adjusted cash flow of a half $1,000,000.15 employees. And obviously, there's more text to that and more narrative, but that's the gist of it. It doesn't say the name. But if I'm a buyer at saying I'm looking for manufacturing, I need, I need at least three to 500,000 in earnings to for me to make the move over here. So that's the intent with the confidential business profile, it serves as our teaser to ferret out the buyers. So once we have the the profile done, we also prepare what's called the confidential business review, or some people call it the confidential information memorandum, also known as sim and the sim, what we do is we we have enough documentation and again, any before anybody sees this, they have to be financially able, they have to have been qualified financially, operationally, as well as have the money and execute the confidentiality agreement. So when we were working with them, they received this what's called the CBR. And the CBR has enough information that answers 80% of any normal buyers questions and answers, you know, the history and answers. Employees now doesn't have names, but it does have roles and compensation, perhaps how many years they've been with the company that evaluates customers against it sanitized, it doesn't say the name, but it does, say, tool distributor, we're getting half a million dollars in parts from them. We've had the relationship for 15 years, and things like that. So again, we're not we're giving them we're phasing information to them. But it's not a whole lot of information that they that they can use, but it should answer 80% of the questions. And it does preserve the confidentiality as we move as we phase it out. For example, like I said, employees, customers, suppliers, people that, you know, before I share with you everything, I just want to make sure that we're moving in the right direction. So again, that CBR it'll answer 80% of any of their questions. So then, we're fortunate we have, we have a dedicated marketing department that moves us into marketing, and what do we do there? So she prepares all of our outbound collateral that we target. So digitally, you know, we've got roughly 12,000, permission based assets or a, a newsletter list that we send, you know, prospective deals to to our buyers. We advertise on roughly 13 or 14 websites. And then we do digital marketing through Facebook, LinkedIn, and some of the other platforms. Again, the marketing that we do or the marketing that she does, is intended to maintain confidentiality. We want to confidentially expose the business to as many people as possible, but nevertheless, with the backdrop that we have to maintain that comp He allottee in our practice, we would prefer not to sell the business and preserve the confidentiality than blow the confidentiality and may or may not sell the company.

Again, it's back to you concentrate on doing the work that you do best. And we'll we'll worry about doing the work that we do best. So now, we start working with buyers, and I alluded to this a little while ago, we present the business to our active buyers, right, and then we begin the qualification process. And as I said earlier, we need to know who we're talking to. So there's essentially three buckets of buyers, you have individual buyers, you have strategic buyers, and then you have private equity groups. So individual buyers, think of it as someone that's buying themselves a job and replacing you. That's one set of buyers, and their first time buyers are not familiar with the process. So from a brokerage standpoint, we are educating them on their on the process, the damage that can be done by breaches of confidentiality, how financing works, how confidentiality works, what you can and can't do in a site visit, when you're talking to the owner, all those kinds of things. So it requires a great deal of education to help that buyer understand it, especially that first time buyer understand what it is that they're getting into. And in fact, we we joke around here that we talk more people out of business than into business. And it's it sounds great that, you know, my my crappy job is I've had it I'm done working for the man, I'm gonna do it. I'm gonna go by myself a company and I right up to the part where you realize that you're not only CEO, but you're also the head janitor. And And oh, by the way, did I mentioned that you're going to have to pay for your own health care, oh, all those things that you that you take for granted from a from some larger company that sounds pretty good when when you start looking at buying a company. And so when we're talking to them, and again, we the reason we educate them that way is we want them to understand what they're getting into. Because again, this is about time, we want the people that we bring you we want you them to have a bonafide interest in your company that they they understand what they're getting into. I don't want to I don't want you to explain to them that. Oh, by the way, you know, it takes 50 hours a week for me to do this. Oh, by the way, do I tell you that I had to all the sacrifices that I had to make in order to build this company like this. And the funny thing is, and the buyer misunderstand what they're getting into. So then the next bucket of buyers is the strategic strategics can be companies, synergistic companies can be competitors can be suppliers, those are the different animal and what do we have to do with them? Well, we have to protect you. And when I say protect you is just because you sign a confidentiality does not mean it's this is like a toll booth where we automatically give you the information, because you've signed a document says you're going to keep it quiet. That it that it doesn't work that way for us when we're teetering working with, with someone that could really damage the business like IE a competitor, we then take the information and we either sit down with you, before we start marketing and say I here's all the reasons why these guys might be a good candidate to buy us. Or if a competitor happens to call, now we can sit and say, Alright, let's work through this. Let's, why would they want to buy this? You know, and, and then we can go back to the buyer and say, You know what, we're just not in a position to share that information with you. And and we're just doing our job and they go away. Now if there's a bonafide buyer that may be a competitor. Now we can start phasing information out to him not the CBR maybe we just say Alright, here's kind of, here's the company, here's why don't we sit down. And let's let's talk through why you want to acquire the company. And then we are able to determine whether or not the the motors are pure. And then lastly, private equity groups, private equity groups are professional buyers. It's you know, when they're coming when when they're looking at a company like yours, that you're either a bolt on or you're a platform when I say a bolt on either they have a platform that by adding your company to it then makes a synergy within their portfolio or you have a company that has enough critical mass that they can make it the foundation of the platform and then start going out and adding other companies to it. Those are the three buckets of buyers and how we screen them. So next, once we go through the screening process and one thing We should talk about a site visits. And a lot of times we don't. When we when we work with buyers, we, a lot of times now we're doing conference calls, Zoom meetings, leveraging technology to have at least that first meeting, it minimizes exposure to the company, as well as it just helps. Number one helps our client, the seller, meet the buyer kind of in a in a in a neutral position and or a neutral setting and get some of their questions answered. And then then if we have a need, we can make the site visit the site visits tend to happen after hours or before hours. If it's a business that, like for example, let's just say a retail business, it's really easy to see 90% of the the operation if you if you walk in the front door and buy something. So it just depends. But again, it's back to confidentiality. Before a site visit, you know, we're reinforcing. You know, here's the confidentiality agreement that you signed, here's what can happen. If you breach confidentiality, here's the damages that can be done. So if you if you are going to go as a customer, go as a customer, don't ask questions, you don't have to ask questions, how many people are coming through the door every day.

Save that for when we meet with the seller or ask us and we'll get that information for you. So once we we get through the through the site visit and the the initial discussions with the our client, the seller, we then move into it's now time to make an offer. And we help the buyer get the offer and understand what the offer is and the contingencies surrounding the offer. Now one of the things I want to make clear, is, here's really where our job starts. I mean, if you can think of a when when when we work with sellers, the leverage that the seller has, is substantially higher than the buyer in the deal, right up to here. Now all of a sudden, the leverage changes the negotiating leverage. So now this now the buyer has kind of a leg up in this, that we're moving down the road with them. Now from a brokerage standpoint, we're sitting here saying, Yeah, you know what, there's a bump in the road, we're putting this thing on the market, and we're gonna get five other people just like you. So our suggestion is, you probably shouldn't do that. But my point is that our job really begins here, maintaining the leverage, or the VA, I should say, our job starts our value really shines when we're able to maintain the leverage for our clients throughout this term sheet and closing process. So we we facilitate the negotiations, we we work with the sellers, attorney, the buyer's attorney, and everyone else that has a hand in this, and we're negotiating to come up with the framework of a deal. And so hopefully, we'll have multiple offers, and we can line them up and evaluate whether or not who's the best buyer, because what we've found after all these years, is that the highest price may not be the best buyer. And again, I'll say that the highest price may not yield the best buyer. And so when we go through the process, we want to to identify, number one who is the best candidate, and who is likely that's going to continue running the business well into the future. So through the term sheet process, that's what we do, we help identify and negotiate the framework of a deal. So due diligence, this is this is a real challenge here, because a lot of deals fall apart right here. And that's why I was saying that the that the integrity of the financial statements, makes the job on the back end a heck of a lot easier. And the reason I say that is because now this is where the buyers is combing through your documentation. And it's pretty much Anything's fair game. And for for the seller, it is it is a very, it's a it's a challenge because now every decision you make every financial decision you make every operational decision you make is now being scrutinized. And so, it's it's, it is takes an emotional toll on the on the seller and from a brokerage standpoint. Our job is to you know what, let's we'll take the information, we'll make it available, we'll distill the information and will again serve as the buffer between the buyer and seller because what and I was telling you, a friend of mine earlier was going through this process and the due diligence or quality of earnings and now

CES that they were going through was just obscene, and, and time consuming. And at the end of the day, you know, they want to renegotiate, even though I mean, there was no change. They didn't if they didn't find anything, there, there literally was no change. But the buyer, again, back to that leverage thing, they're sitting here saying, Well, you know, what, I just don't feel as good about the financials as I originally did. And what's the seller going to do? So this due diligence, and again, due diligence can be a bunch of things, financial, operational, legal, those kinds of things that that we facilitate. And again, what the buyer is doing at this stage is just trying to understand everything about the business, as are understand as much about the business as possible, so that when they go, when they take over, they hit the ground running. Next, what we do is, when we, we seal the deal, this is really an anticlimactic component of the job, you know, we're preparing, we're helping coordinate the the documentation that memorializes the deal. And we work with all the advisors to to get to that point, whether it's financing and accounting, legal. This is really like I said, it's a signing ceremony. I mean, it's a it's happy ending work, but it's really anticlimactic. Getting to this point is been the challenge, signing the documents is probably the easiest thing that happens. So again, take away on seal the deal.

It's a matter of coordination of legal documentation. So one of the questions that we get asked is who does the legal work. And so the legal work can be done in a couple different ways. I mean, obviously, the sellers attorney can draft the documents, but then it's skewed to the seller, if the buyer's attorney drafts documents is skewed toward the buyer, or we can use an escrow attorney. Now, on some of the smaller deals, we use an escrow attorney and basically we say, here's the framework of the deal. Here's what we need you to legalize it. And so they take the document, they legalize it, they share it with the buyer and seller, the buyers and seller can then take it to their attorney, and put the final touches on it. At the end of the day, it minimizes the legal expense. Now, the bigger the deal, you know, chances are, it's going to be done by the buyers attorney. And then we just work out the details as we go. But generally speaking, the smaller the deal, I'd say probably purchase price of 2 million and south, we see a lot of a lot of times utilizing the escrow attorney.

Okay, post closing, and here's where you share information with the people that need to know, you know, there are different ways to communicate change of ownership, some have said, you know, this is my new partner, some have said, This is who is bought the company, and here's the strategy going forward. So when she takes over, she's going to be able to have your jobs are secure, let's just say I'm 72 years old, you know, I don't have the energy to grow this the way it needs to. And this person can and that's why sold it to her, we spent, we spent an exorbitant amount of time finding the right buyer that shared the same vision that we do. And this is why this person, we sold the company to them. And we're certain that that your jobs are secure. And going forward, it's better for everybody. And then, you know, there's so that's kind of the dialogue for employees. Same thing with customers and suppliers, how you transition, you know, the the seller typically remains for a period of time in order to make introductions and so on. So businesses sell, you know, there's transitions of ownership all the time. So I know I say it shouldn't be a surprise, but having a a transition strategy on here, here's how we're going to do this typically works really well. And we work out these details prior to closing. And then next we'd look at transition from management to the buyer. Again, that's buyer and seller work together with management team to transition. And then lastly, you know, post closing issues. Most of the time, we don't we don't see a whole lot of that.

It's been pretty much well thought out before we got to that point.

But again, if there's post closing questions normally like this for some of the smaller deals, you know, transferring domains, utilities, things like that, those are the kinds of things that crop up, but again, we're in a position to help we've we've seen it 100 times. So

So, that is the nine step process. So let me move to the questions. I talked a little bit about telling key employees, and that you should not do that. There's three questions regarding sale price. So we're how to determine it. Our next webinar is going to be how the buyer sees the business. And there's eight key drivers of business value, and we're going to go through those. But for those of you who are interested in business value, I have a podcast that's called defenders of business value. So if you go to wherever your favorite podcasts are, so whether that be Apple podcasts, or Google Play, or Spotify or iHeart, it's there. And it's Alexa. It's called defenders of business value. It comes out on Mondays and Fridays. And that's all we do. We talk about business value, what creates it preserves it and ultimately transfers, transfers by way of a sale that is, so if you have a specific question on value, certainly reach out to me edit Indiana business advisors. I'm happy to answer whatever I can for you. So thank you so much for joining us today. I hope you found this valuable and we believe that educated business owners are the best clients so if we can help in any way, please let us know. Thanks so much. See you next month. This was another episode of the defenders of business value podcast for more episodes packed with strategies to increase the value of your business visit defenders of business value.com For shownotes transcripts and free tools to start you on your journey. Subscribe now so you don't miss any future episodes.