Planning, Timing and Keeping Emotions in Check Are Keys to Success

The rapid pace of mergers and acquisitions today is an outgrowth of unique economic and social factors such as the COVID-19 pandemic and the wave of retirements of the Baby Boom generation. As a result, the buyers of small and medium-sized businesses can range from large institutions to retired individuals.

The key question for sellers is not just whether they are finding the right buyers, but whether they are adequately prepared for exit. Most owners of small and medium-sized businesses have never gone through a sale and should understand the factors that distinguish between successful business transitions and rocky ones

Establish a Roadmap

In the pre-acquisition phase before entertaining offers for your business, it’s important to establish a roadmap to help guide you through the process. As with any journey, knowing where you want to go is only half the battle. Knowing how to get there and who will help you along the way is important, too. Consider these factors:

  • Who should be involved in the exit journey? Assemble a team of advisors who can help you prepare your business for sale, whether it be your accountant, your attorney, your banker, or all of the above. Your team also may include a valuation specialist.
  • Obtaining a business valuation will help form a baseline rationale for your asking price and benchmark that value to the market if the information is available. If the value doesn’t align with the asking price you had in mind, figure out why and how you can get reach the value you want. A valuation report should provide guidance as to what improvements to the company could increase its overall value. This is the time to invest in your company to get to the asking price you want.
  • Who are your likely buyers? You may not need to go out to the market to find a buyer if you have a family member, a group of key employees, a competitor or a large customer who would like to buy your company. If you are in a market with limited buyers, you can contact an investment banker who has a larger network to explore opportunities for more buyers.
  • What are the cash flow and tax implications of the sale? The deal structure will be important in determining cash flow and tax issues. The deal structure also will help determine things like your earnout period and how any outstanding company debt will be paid off.
  • Determine what needs to be done to satisfy all stakeholders, including banks and potential buyers. If your business has never had a financial statement prepared, reviewed, or audited by a third-party CPA firm, now is the time to obtain one. This will help move any negotiations forward more quickly.
  • Consider the post-acquisition phase as you do your planning. What will your continuing obligations be to the company, particularly during an earnout period? You should plan on being involved in transitioning key relationships with employees, customers and advisors. The new owners will bring in their culture and technology, but you can continue to provide industry insight and experience during the transition phase.
  • Your personal needs and the shape of your estate will determine what the terms of the deal will look like. You’ll need to decide on a price that will help you retire, as well as what you expect to receive in cash and what kind of tax implications you can live with.

Manage the Emotional Risk

Managing the emotional side of selling a business is more important than it may sound. A business is not just a set of books, a production line, inventory and customer accounts. It is long-time employees whose loyalty and hard work helped you achieve success. It may be your life’s work or a multi-generational legacy of your family. It is probably a key part of your personal identity.

You don’t want these emotional factors to disrupt or derail the business sale process. Listen to your trusted advisors who will help you avoid making emotion-driven mistakes.

Keep in mind:

  • Be honest about your business. We’re all biased, but you need to be honest about where you think the company’s value is and where it needs improvement. A buyer will likely bring in an independent consultant to assess the value points, so you don’t want to be caught off guard.
  • Don’t treat diligence as criticism. The negotiation process can feel like the buyer is beating up the business. It’s easy to get angry and frustrated, which will impact the negotiation process. But the buyer is managing their risk and investment, and that’s going to drive the negotiation. Just stick to your number but make sure it’s an honest number within your industry.
  • If you are selling a family-owned business, particularly one that has been in your family for generations, find the right buyer to preserve the legacy of the business. Make realistic decisions about what you may be willing to trade off, such as some selling price, for legacy preservation.
  • Understand the roles and responsibilities of the involved parties and what they will want to see. The buyer’s team will ask for confidential financial and operation information that you may feel uncomfortable about disclosing. Non-disclosure agreements protect you. They can’t buy the business without seeing this information.
  • Understand that the process takes time, costs money, and involves additional work and stress you need to prepare for.

If you would like to have a conversation about putting a transition plan in place for your business, contact your Adams Brown advisor.