On a good day the cloud of misinformation surrounding the process of selling your business is irritating. On a bad day it is infuriating.
I was recently helping a business owner prepare his business for an eventual sale. The first exercise we went through was analyzing the P&L and normalizing it to show cash flow from operations. I helped him understand the cash flow of his business, and explained how cash flow affects valuation. I also gave him a few follow-up items for his bookkeeper.
A few weeks later I got a giddy Email about how the bookkeeper had not only cleaned up the P&L as per my instructions, but had also recommended adding owner’s draws to our cash flow calculation. By doing this he could immediately add $400,000 to the value of the business. Wasn’t this great news?
And just like that, the expectation I’d worked so hard to set went up in smoke.
A good business broker or M&A advisor will spend hours educating a business owner about what to expect at every phase of the selling process. This difficult job is often made harder by the fact that misinformation about selling a business can come from every direction — from preconceived notions held by business owners themselves, to bad advice from well-meaning peers and advisors.
Following are four stubborn myths about selling your business and their corresponding realities:
Myth #1: My current advisors will help me with the selling process.
First let me say that your current advisors — primarily your CPA and attorney — may be great at what they do. A good advisor has probably saved your bacon on more than one occasion over the years. You may even credit them for helping you become, and remain, a successful entrepreneur.
The issue isn’t whether or not your advisors are good at what they do. The question is whether “what they do” is specialize in helping owners with business exits and sales.
Chances are your attorney and CPA are very competent, but they don’t do M&A transactions on a daily basis. If your advisor doesn’t list M&A, exit planning or corporate transactions as a specialty area then they probably only work on the occasasional deal. Maybe they’re good at it, maybe they’re not. The problem is, you won’t know until it’s too late.
To add a wrinkle to the problem, you probably have a great relationship with your current advisors. You may even be friends outside of business: You live in the same neighborhood, your kids attend the same schools, you go on vacations together. The last thing you want to do is hurt their feelings, or infer that you don’t trust them or their abilities.
“I have to live next to this guy!” a client once blurted out in frustration.
The reality is that selling your business is a one-shot deal. A transaction of this magnitude and complexity requires hiring specialists. Good advisors will admit that they are not the man/woman for the job and refer you to M&A specialists, similar to the way a family physician might send you to a specialist for a cardiac issue. Whether it’s your health or your business, you’ll want a trained and experienced specialist. The result of not hiring the right advisors to help you sell your business could range from disappointing to disastrous.
Reality: Selling a business requires specialized expertise in every area of the sale process. You’ve got one shot to do it right: Hire the experts.
Myth #2: My business is different.
No, I’m not calling your baby ugly. On the contrary. In my experience every business is unique in some way. In fact, the endless variety is one of the things I love most about being a business broker and valuation specialist. Businesses are like snowflakes; no two are exactly alike.
This myth has more to do with thinking that we are the exception, and that the rules don’t apply to us and our business. Much of this can be explained by behavioral finance and our own cognitive biases. Simply put, it’s human nature. One example is the endowment effect — the notion that what we own is worth more than its market value simply because we own it.
The my-business-is-different myth is perpetuated every time another story is published about a VC-backed tech startup with no revenue selling to Facebook for a bazillion dollars. Do outliers like this (a.k.a. unicorns) exist? Sure they do. But like unicorns, they are incredibly rare.
Most middle market business sales takes place within a reasonable range of variables when it comes to valuation, financing structure and deal terms. If you’re able to do well within these ranges — or maybe even beat the high end of the range — then great! Just don’t fall into the trap of thinking the expected norms based on size and industry don’t apply to your business.
Reality: It’s unlikely that your business is an outlier. Understand how buyers view businesses in your industry, and don’t assume that your business will be treated differently.
Myth #3: Selling is about getting what I want.
It’s easy to think that you’re in the driver’s seat when you’re selling your business. You’re not going to walk away from a lifetime of work unless someone makes it worth your while. A buyer can give you what you want or hit the bricks, right?
Wrong. Unless what you want is to run your business indefinitely.
If you plan to approach negotiations with a take-it-or-leave-it attitude, then you might as well scrap the idea of selling your business. Buyers and their deal teams are way too smart to play that game, nor will they waste time with “unreasonable” sellers who don’t acknowledge the buyer’s point of view.
The essence of any successful sale is understanding what the customer wants. Selling a business is no different.
This is not to say that your goals for a sale aren’t relevant. They most certainly are. In fact, you’ll want to work with a seasoned business broker or M&A advisor to identify your primary goals for a sale before going to market, and them clear early on in conversations with buyers.
The buyer will also have clear goals for an acquisition. You’ll have a hard time closing a transaction if you’re unwilling to work towards satisfying the buyer’s primary goals, in addition to your own. As a veteran M&A advisor once told me, “Deals get done when both sides are equally unhappy.”
Reality: You will not get everything you want in a deal, and neither will the buyer. Be prepared to find common ground.
Myth #4: I’ll be able to sell when I’m ready.
This myth is perhaps the most insidious of the four. It leaves behind a trail of missed opportunities that can result in personal and financial disappointment…or worse.
Myth #4 is perpetuated by the notion that selling a business is like selling a house. You simply find someone to help you sell it when you’re ready, they find a buyer and that’s all there is to it.
The reality is that timing the sale of your business can involve much more than you deciding you feel ready. You also need to consider your business, your industry and general market conditions:
- Is your business ready to sell? It may take months or even years of preparation to either make your business sellable, or make it sellable at a valuation you’re happy with.
- Is it a good time to sell in your industry? If you wanted to sell your business in the oil and gas industry in 2014, plummeting oil prices made it very hard.
- Is the economic climate good for selling a business? There were a number of business owners who were ready to sell in 2009. Unfortunately, the economy crashed in 2008 and it was a good four years before considitions for buying and selling businesses got better (i.e. banks started lending to small business again).
If your exit strategy is to sell your business to an outside buyer, then a number of pieces will need to be in place for that to happen. Don’t wait until you “feel ready” to get started.
Reality: Selling a business isn’t like selling a house. It can take years of preparation, as well as the right timing for you, your business, your industry, and the overall market.
Are you and your business sale-ready? Download our 10-point checklist.
If you’re thinking about selling your business, the advisors at Allan Taylor & Co. are here to help. Let’s talk.