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Dan is ready to gracefully exit the business world, but he's not sure what to do with his hardwood flooring contracting company. As difficult as it is for Dan to admit, his kids just don't have any interest in his business, so he can't pass it down to them, yet he hates the idea of dissolving something he has built and grown for the past 40 years of his life.
If you're like most business owners, you cherish your business with all the love a mother lavishes on her child, and you hate the idea of selling your baby to some stranger. Fact is, though, there are many reasons why you might reach a decision to "cash out." Maybe you're looking at retirement with an eye on the golf course. Maybe your knees and back just can't take the labor anymore. Maybe your children don't want to take over the contracting business. Or maybe you'd like to take the cash you get from a sale and invest in another business. Whatever your reason, deciding to sell your business is one thing. Doing it right is something else.
Setting a Price
Like most people contemplating the sale of their business, you probably have one paramount question: "How much can I get?"
"If you really want to sell your business, pricing it correctly is critical," says Jim Rabe, managing director of Willamette Management Associates, Portland, Ore. "If you overprice the business, it won't sell. And if you underprice, you'll leave money on the table."
"Your business may very well be the most important asset in your life," says Roger Winsby, president of Wakefield, Mass.based consulting firm Axiom Valuation Solutions. "You need to have a realistic valuation done before selling it."
One ballpark estimate formula is called "the earnings multiple." This calculation values a business based on the cash it generates, or its annual cash flow. To figure the value of your business, start with your annual bottom-line profit figure. Then add back what you have deducted during the year for interest, taxes, depreciation and amortization. The resulting cash flow number goes under the acronym of EBITDA (pronounced "eh-buh-ta"). That stands for "earnings before interest, taxes, depreciation and amortization."
Businesses are often valued in terms of a multiple of cash flow. "For smaller companies, the sales price almost always comes out around four to six times EBITDA," advises Rick Rickertsen, managing partner of Washington, D.C.-based private equity firm Pine Creek Partners. So, if your business' EBITDA is $300,000, then your business may sell for $1.2 million to $1.8 million.
Getting Valuation Help
Simple formulas will take you only so far. Your business is like none other on the planet, and that means it possesses a host of characteristics that will affect its selling price. "To get a realistic valuation, you need to thoroughly analyze your market, your industry and your business position within that industry," notes Kurt Myers, a valuation analyst in Goodlettsville, Tenn.
This valuation should be done by a specialist who addresses issues such as regional economics, the presence and quality of competition, your own business' growth trend, the quality of your management team and even the extent of your customers' loyalty. Long-term contracts to supply services and goods can help inflate your selling price, and so can a lean and mean inventory situation.
An analyst will also try to determine your organization's goodwill, which also affects value. "Goodwill includes many intangibles," says Mark DiQuattro, a business valuation analyst in Belleville, N.J. "They include the value of past advertising, the state of your customer and client relationships, and your employees' proprietary knowledge and loyalty."
Does all this sound like a lot of effort? That's because it is. A professional valuation for a business of any size can take nearly two months. And in the final analysis, the process still won't generate a completely reliable number. In the end, it's the buyer who sets the selling price—and businesses often have different values for different buyers. If your business is in a location attractive to a larger company looking to expand into the region, for example, its selling price could be higher.
Don't overlook other sources of advice. Your accountant can help you determine the strong points of your business. There are also individuals with businesses similar to yours in other parts of the country; some of them may have been looking into a sale on their own and can share valuable information.
A Potential Pitfall
We've already covered some factors that might inflate the selling price of your business. Conversely, one characteristic can depress a sale price considerably and sometimes even block a deal: the lack of a durable management structure in an organization where profitable operations too often depend on the presence of the owner.
"Any buyer will want assurances that your business either has a management team that will stick around or a second level of management ready to take the reins," Winsby notes. "To make your business saleable, you need to have people and systems in place for the future. If you do not make yourself irrelevant to your business, it will be hard to sell."
If your continuing contribution to a business still represents a good part of your organization's value, you may consider providing your services in some way to the new owner. "It is not atypical for a previous owner to stay around either part time or on a consulting basis," DiQuattro says. "That also gives the employees some comfort that the old boss will be around. It alleviates fears and concerns."
Finding a Broker
You can also obtain insight into your business' possible selling price from brokers. These are the individuals who act as the go-betweens, matching people with businesses to sell with those who want to buy.
Maybe you've already heard from some of the many business brokers who like to "cold call" companies and ask them if they would like to go on the block. Once these brokers get the go-ahead from a business like yours, they track down potential buyers.
Plan for Success
Getting the best price for your business takes careful planning and patience. "The whole process of evaluating a business and closing the deal typically takes from six to nine months," DiQuattro says. You may need a month just to get your paperwork together, including copies of customer agreements, employment contracts and leases. Obtaining a professional valuation might take a couple of months, then going to market can take three or four months or longer.
Of course, you might be one of the lucky ones who sells the business in 60 days. Just avoid the temptation to rush to market. Invest the necessary time to understand your business' position in the marketplace, and then price it right.
Breaking the News
When should you tell your employees about an impending sale of your business? Timing the announcement can be difficult. You don't want to announce a sale so far in advance that you cause unnecessary workplace turmoil. This would be especially damaging if you finally decide against selling because you think you can get a better price later.
On the other hand, waiting too long has a downside: Putting a business up for sale is far more difficult to keep secret than you might realize. Once the rumor mill starts grinding, your best employees may resent being kept in the dark. Worse, believing they may soon lose their jobs, they may jump ship for competing contractors. That can leave you holding a business with diminished value.
"There is no upside in telling your people," counsels Dr. William Rupp, dean of the college of business at the University of Montevallo in Montevallo, Ala. "If you tell them early you are a 'quitter.' If you tell them late you are a 'cheater.' "
Some consultants advise informing people just as the buyer has come to a final agreement. "The best way to tell your employees is one by one, all on the same day," says Mark DiQuattro, a business valuation analyst in Belleville, N.J. "Schedule a half hour or an hour to talk to each, so they don't find out little by little and the gossip mill starts. Start with your senior employees and work down."
Avoid announcing the sale in a group meeting, DiQuattro advises. Frightened employees will start asking questions that are difficult to defuse in front of everyone, such as "Don't you care about the employees?", "Will the new owner fire us all?"and "Company XYZ got sold and they let go of half the employees. Will that happen here?"
Consider locking in your best employees with one-year contracts. This will do more than help them feel secure when they hear about a pending sale. It will also assure your buyer that your top talent is aboard for the long haul.
Seeking Support
• For valuation advice, check out the Institute of Business Appraisers at www.go-iba.org; and the National Association of Certified Valuation Analysts at www.nacva.com.
• You can find brokers in the database of the International Business Brokers Association (IBBA) at www.ibba.org.
Another source for brokers is the database maintained at www.bizbuysell.com.
Know the Score
It can take some serious dollars to hire the professional assistance requisite to putting your business on the selling block. How much? Here are a few estimates from Rick Rickertsen, managing partner of Pine Creek Partners, a private equity firm based in Washington, D.C.:
• Legal representation. A lawyer with experience in mergers and acquisitions may run from $10,000 to $100,000, depending on the size of the deal.
• Broker. Who will intermediate between your company and the marketplace? Maybe an investment banker, with charges typically running from 3 to 5 percent of the selling price. Smaller deals may be handled by business brokers, with fees often ranging from 5 to 10 percent of the sale.
• Accountant. You will need a set of audited financials prepared by a Certified Public Accountant (CPA.) This could run $40,000 for a small business.
• Valuation professional. A specialist may charge from $20,000 to $25,000 for determining a fair price for your business.
Some costs are monetary. Others are psychological. "Don't overlook the intangible costs associated with selling your business," warns Dr. William Rupp, dean of the college of business at the University of Montevallo, Montevallo, Ala. "It may well happen that the people who buy your business lack your passion for the organization. They may just be wondering, 'How can we make money with this?' and the answer may involve cutting many of the things you have long considered important." Maybe the new buyer will terminate some of your favorite personnel, reduce benefits or even cut back on the quality of goods and services,. If you have agreed to hang on as a consultant, you may find yourself in emotional turmoil, so prepare yourself for the emotional impact the sale may have on you.