Frequently Asked Questions
When is the best time to sell my business ?
If you are like most business owners, you have devoted many years of hard work, sweat, and emotional dedication to your business. Thus you are not only selling a business, but a lifetime.
There are several factors that you will consider when deciding to sell; including personal , business and financial considerations.
Your Personal Considerations should include:
Why do you want to sell ?
Can you give up your “baby” ?
How long would you be willing to stay with your business after the sale ?
Other interests – what will you do after you sell your business ?
What is your lowest “Happy Number?” Would you take a check for this amount and leave?
Your family dynamics – do you have children that desire to transition into owner/operators of your business ?
Your estate planning needs.
What are your economic needs after your business is sold ?
Your “Financial Security” needs ?
Your financial needs to live the “Life Style” that you choose ?
Your capital needs for other investment opportunities that you wish to pursue ?
Only you can figure out if selling your business fulfills your personal needs.
Your Business Considerations are more objective and should include:
Is the timing right? Is this a good time to sell ?
Is your company properly positioned ?
Is there a management team to ensure continuity of operations ?
What are the risks associated with keeping your business ?
What changes need to be made to your business to enhance value ?
Do you have the time and knowledge to complete the selling process ? (8 to 14 month process with 500 to 600 hours of meetings – start to finish )
Disruption – can you afford to take this time away from managing and running the company?
Do your present professional advisors (CPA, attorney, etc.) have experience in merger & acquisition transactions and can they help?
Will you need to invest more capital, both now and in the future, to grow your business ?
The welfare of your employees and key executives after the sale ?
If all of the above considerations have led you to the decision to sell your, then our 30 years of experience has taught us one thing :
The best time to sell a business is when it is growing in both revenue and earnings, and is forecast to continue that growth for at least the next 3 to 5 five years.
The highest cash price that you will receive for the sale of your business is paid by a buyer that views your business as a growing entity , both now and far into the future !
What selling price do I place on my business ?
There is no “Formula” that exists for the valuation of a business which is universally applicable or acceptable . Several IRS rulings have established that
“No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock”
Other IRS rulings establish the need to include market research as a vital element of any evaluation:
“Valuation…is, in essence a prophecy as to the future and must be based on facts available at the required date of appraisal”.
The ultimate value, or selling price , of a closely held business is not based on any one , two or three factors. It is instead based on all relevant facts.
The range of value for a closely held business is influenced by:
1. Primary Economic Return to the buyer;
This approach combines the residual value of all assets, the discounted future cash flow, and the dividend paying capacity of the closely held business and establishes the primary economic return to the buyer for their acquisition investment.
In addition, to discounted future cash flow, the buyer of a business will normally be acquiring current assets such as accounts receivable and inventory, plus fixed assets such as machinery and equipment , furniture and fixtures, rolling stock, etc. The residual value of these current and fixed assets could represent additional return to the buyer.
Recasting Financials increases Primary Economic valuation :
Basically , it is the future of a company that the seller is selling, and the buyer is buying . Accordingly, the primary objective of the Business Valuation Process for the seller is to maximize the selling price by examining the company’s historic financial performance, and conduct financial recasting, to establish the base of a salable and realistic future performance.
Privately held companies keep reported profits- and thus taxes- as low as possible . This practice is both normal, fully compliant with the tax code, and entirely proper.
“ Anyone may so arrange his affairs that his taxes shall be as low as possible. He is not bound to choose the pattern which will best pay the Treasury. There is not even a patriotic duty to increase one’s taxes. “
Thus to gage a company’s true earnings history , income statements should be recast to convey a realistic accounting of what earnings would have been had the principal objective of the business owner be one of creating the highest profits possible, without minimizing taxes. manner . Typically 3 to five years of historic analysis of profit and loss is used. In assessing historic financial performance , Earnings Before Interest, Depreciation, and Taxes(E.B.I.D.T) is an important measure of financial performance.
Along with income statements, balance sheets must be recast to accurately reflect the likely current market value of a company’s assets and liabilities. Depreciation , inappropriate inventory valuation techniques, and inflation are among the factors which can cause market value to differ from book value.
2. Synergistic Factors
This approach looks at influences to valuation that include factors that are highly attractive to a specific type of buyer. They constitute the foundation of a synergistic valuation in which secondary influences to value may include:
- New Market entry – where a customer of the business represents a situational off balance sheet asset for the buyer.
- Growth in existing markets – where a customer base plus the eliminatin of competition represents a situational off balance sheet asset for the buyer.
- Add-on products or services for existing clients of the buyer.
- Financial consideratins such as improved Return On Sales, which often occurs when, for example, a manufacturer acquires a service company.
Buyers that include Synergistic factors in their valuation of the selling business will often pay a premium over and above what Pure Economic buyers are willing to pay. But even synergistic buyers must consider the ultimate economics of their acquisition.
Who would be the best buyer for my business ?
Our experience over the past 30 years tells us that there are 7 types of buyers for most businesses .
The primary questions that you, the seller of a business, needs to answer are:
Which buyer is right for you?
Who will give you the most total value for the sale of your business ?
Below is a list of the 7 types of business buyers. Click on them to reveal their characteristics; and some areas of caution .
Add, diversify, or expand into a new business
Expand geographically or looking for synergistic fit (products & services)
Consolidation of functions typical (accounting, purchasing, human resources, etc.)
Owner may not be required to stay unless “Earn-out Deal Structure.”
Caution: Anticipate some of your people will be made redundant
Looking for consistent or higher earnings – increased earnings per share if buyer is a public company
Looking for growth opportunities and possible add-on acquisitions
Exit strategy – sell company or take public
Management Team expected to stay – few if any people made redundant. Owner can exit after earn out if management team is strong.
Caution: Looking at pure economics of the deal
Private Investment Groups – Equity Funds
Looking for synergistic fit with their portfolio companies if target company meets their investment criteria (revenues, EBITDA, etc.)
Looking for new “Platform Company” for eventual add-on acquisitions
Transaction will typically be a “recapitalization.” 70% to 80% equity in company with upside 3 to 5 years out through an IPO or sale
Not interested in day-to-day operations
Will provide strategic direction at the Board level
Caution: Want strong management team in place
Typically use the IPO “roll-up” as a strategy and then add-on acquisitions
Could be an equity group or a dominate company in the industry
The question – is bigger better if you are in the same geographic area with the other companies in the “Roll-up” and have very little synergism with the other companies?
Owner/sellers can anticipate a small amount of money upfront with company (buyer’s public) stock as major percentage of purchase price
Not an exit strategy unless a strong management team in place
Caution: Most IPO “roll-ups” in the 1990’s performed poorly
Caution: Typically 144 Restricted Stock and may have to wait in a long line to sell stock
Could be a good alternative if he has significant cash for down payment and company lacks a strong management team
Evaluate his entrepreneurial skills vs. big company mentality. He may not be a “Hands On” person if this is needed
Consider a “Phased” transaction
Buys percentage of equity to learn business with option to buy remainder of shares
Caution: Avoid risk of taking note and substantial earn-out paid out of profits. You could get the company back
Management & employees
Could be a good deal if a LBO-Leveraged ESOP (Employee Stock Ownership Plan) strategy is used
Don’t waste time or share financial and confidential information until they “HAVE” a commitment to finance the transaction – not “IF” they can arrange the financing
Caution: If leveraged ESOP is used, be prepared to pledge your proceeds from the sale (QRP) as collateral for their loan
Can typically expect consolidation of functions and people made redundant
Caution: May not maximize value compared to other buyers
Caution: Confidentiality extremely important in discussions – avoid word “Leaking” on street that you are for sale or in trouble – negative impact with customers
Caution: Competitor has valuable information if deal does not close (customer list, pricing strategies, etc.)
What are the Deal Terms and Structures of selling a business ?
In any transaction involving the the sale of a privately held business, it is usually the seller that ultimately dictates the price that he will accept, but it is the buyer that dictates the terms of the deal.
Thus , if the buyer accepts your selling price, then you will most likely need to accept his payment terms or structure.
Our experience over 30 years has taught us that most business sale transactions take the form of a structure that can include all, or some, of a combination of cash, stock, notes, and earn out.
Let’s look at some pros and cons of each component of a total deal structure:
All cash ?
Pro: Clean break from company (invest net proceeds)
Con: Substantial Tax Consequences
Installment Sale ?
A pay out of the purchase price over pre negotiated annual installments.
Pro: Tax bill spread out and buyer pays interest on amount due
Con: Buyer may not be able to pay remainder due in future years
Buyer Note ?
The payment of the purchase price to the seller over a period of time, including interest, at a pre negotiated interest rate. Buyer gives either a personal guaranty (best) , or corporate only guaranty , to the seller
Pro: Principal and market interest payments over period of years.
Con: Buyer may default on principal or interest payments in future.
Buyer’s stock ?
Pro: No tax on stock until sold- in most cases
Pro: Participate in growth of buyer’s company
Con: Stock could decrease in value
Con: May be restricted stock (public company) and take time to sell
Con: Illiquid market (private company) – no outlet for sale of stock
Earn Out ?
Involves some form of payment upon deal closing, with additional payment in the future (2 to 3 years) upon the achievement of mutually agreed to performance objectives.
Pro: Can be a benefit to the seller if future company performance is anticipated to be very good in the next few years.
Con: Seller needs to stay active in the business to ensure performance objectives are met in order to realize the benefit.
Executive Management and/or Consulting Contract ?
An arrangement that compensates the seller of the business for his services as a member of Executive Management or as a consultant to the business, for a specified period of time.
Pro: Seller participates in managing the future success of business.
Pro: Increases probability that Installment sale and Buyer Note payments will be fulfilled in future.
Con: Seller may not enjoy, or adjust to, working with new “owner” of the company.
Based on your personal and financial objectives , as well as your current position in life, only you can decide what combination of deal structure works best for you.