Preparing Yourself

Issue NL3:

Preparing Yourself (deciding to sell),

Step 2 in your Exit Strategy Plan

Why you are selling?

A buyer always asks, "Why are you selling?" You
need a sincere, convincing reason to entice the
potential buyer to move forward with you to the
closing. But, more importantly, you need an answer for yourself. Which of the reasons below most nearly describes your situation?

The buyer's greatest fear is that he/she will
go through the expensive due diligence process
and end up with a seller that refuses to sign.

The sale of your business will probably be the
single biggest financial transaction of your lifetime.

Deciding to sell is not something to leave to
chance. Selling a business is a complicated process.

A half-hearted attempt or a passive attempt to
sell will end in disappointment in the price you
receive or disappointment when the sale doesn't
close.

In deciding to sell your business, three factors
have to converge: your motivation, your personal
timing and your value expectations.

Your motivation
Unless you have the numbers or story to do an
IPO, you will always make more money by keeping the business rather than selling it. This means you have to be motivated by something other than money.

Thinking about selling requires that you think
through the consequences of selling. What are
you going to do after you sell? Will you have
enough money to pursue your other goals?

Selling your business is a taxable event. Are you prepared to pay all those taxes?

Selling your business requires that you analyze
your reasons for selling. It's a mistake to start
the process until you do.

Let's look at some of the reasons for selling:

Burnout

By far the most common reason businesses are sold is owner burnout. How do you know you have it? You have it when it's not fun to go to the office any more. You have it when you see dozens of ways to improve the business, but don't want to start any new programs.

You have it when a 15% increase in sales is more headache than exhilaration.

You have it when you lose interest in your employees' growth and development.

You have it when your housekeeping and systems become sloppy because you don't seem to care anymore.

You have it if you are fed up with managing employees.

You have it when you become vociferous with the regulatory bodies.

You have it if you are bored with the tedium of it all.

Think about it. Is there anything that you could
do to make the business exciting again? If not,
you have an incurable case of burnout. Selling
your business is probably the only remedy. But
be careful. Many times burned out owners just
can't make themselves sign on the dotted line
when they face the reality of letting the business go.

Retirement

Some business owners retire at 50, some at 70
or older and some never. Intermediaries talk about the 50-70 rule. The business owner under 50 won't sell because of age; the business owner over 70 won't sell because of he/she is beginning to think they're immortal.

Retirement can come when you have enough money to live the rest of your life in reasonable comfort without working. This condition could happen at any age. Business owners have more flexibility in making the retirement decision than employees.

In my experience, most business owners seem to
retire in their early sixties. The lure of retirement is
the second most common reason for selling a privately held business.

Health Failing

Health is a frequent reason for selling a business.
A business owner with failing health realizes that the time to sell is before health fails completely. To fail to decide to sell at this point may result in a severe deterioration in the value of the business.

Family Considerations

I have seen family businesses destroyed by brother suing brother and by father suing son. Even worse than shattering the business is family estrangement. I know of one case where a grandfather has not been allowed to see his grandson because of a business dispute between the father and son. I know of another where the grandfather has disinherited his son and his grandsons.

There are many facets that come under this category: The spouse threatening divorce, father/son estrangement, sibling rivalry, in-law employees not pulling their share, family mutiny and other similar family conflicts may threaten to destroy or cripple the business. If so, the solution may be to sell to an outsider, distribute the money and mend the family rift. Don't let family business disputes destroy family relationships.

Investment and Estate Planning

If you have a substantial portion of your estate
tied up in your business, you worry. You worry
that one bad period can wipe you out. You worry
about the personal guarantees at the bank. You
worry when return on investment from the business
is not competitive with other investments. The
result is a desire to sell or to reduce your equity
in the business to diversify your personal investments
and to get your estate in order.

Reducing your equity by taking in a partner is
fraught with hazards. I frequently hear horror
stories on this issue.

One way to sell equity and keep control is through
an Employee Stock Ownership Plan (ESOP).
Or you may do a recapitalization, taking in a
financial partner while you take some chips off
the table.

Burning Desire to Do Something Else

You may have a burning desire to open a scuba
diving school in Belize or start an animal safari
park in Hillsboro. You may want to become a nun
and teach entrepreneurship to the homeless in
the inner city. The equity you have built up in
your business may be more than enough to catapult you into your operatic career.

If your burning passion is not the business, you
will probably be better off without the business.

Other Business Interests

You have two businesses and you can't run both
effectively. Or your father wants you to come and run the family business. The solution may be to sell one of the businesses.

Inadequate Personal Financial Strength

Your business may need more money that you want to invest in it. If the money is not invested, the business will miss a significant window of opportunity that could affect the growth of the company for years.

Selling part or all of your equity may be the best strategy.

Enough Money

You have more than you could ever possibly spend for the rest of your life. You wonder, "Why am I putting up with this hassle?"

Offer You Can't Refuse

It happens. Not very often, but it does happen. You may get an offer you can't refuse. After all, you rationalize, "Everything is for sale at a price."

Your pot of gold may come as a result of an unsolicited bid from Megabucks Corp., or it may come as a result of your going public. In either event, all or part of your ownership is transferred to new entities.

Orderly Liquidation

The value of the business assets in liquidation may be more than the value of the business as a going concern. If you cannot see any potential improvement for the future, you may decide to liquidate the business and invest the proceeds more profitably elsewhere.

One business owner I interviewed had a chain of
lumber yards where the real estate was appraised at over $6 million and the business was struggling to make $300,000. This was a clear liquidation scenario.

The owner would make more money by selling the real estate and investing in treasury bills even if he gave the business away.

If you have a high asset value, low margin business, you should evaluate the feasibility of liquidation vs. selling as a going concern.

Death

If the business survives your death, someone else
will own it. You need to make sure that the business will survive and that someone else is the person of your choosing.

If you plan to die with your boots on, make sure you have an estate plan. Even if you don't plan to die with your boots on, make sure you have an estate plan. It will save you megabucks in taxes.

Your Personal Timing

In our newsletter of two months ago, we talked about "The Exit Strategy Plan." Thinking through an exit strategy and deciding upon the triggering events is important aspect of setting your personal timing. You can review that newsletter here.

Valuation

There is one other piece of information necessary
before you finalize your decision. That is the price the business is likely to bring, and the after tax benefit you will receive. In a future issue of Selling Your Business, we will talk about "Valuing the Business."

Action Plan

As you think about selling your business, review your real reasons for selling, review the consequences of selling and then come to a firm decision to sell or not to sell.

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Tip of the Month

Buying a business is like buying a piece of equipment. The buyer expects a reasonable return of the money invested relative to the risk involved.

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Next Month

Next month we talk about Step 3 in the Exit Strategy Process, Selecting the Intermediary, who, among the myriad of functions he/she performs, will help you with determining a realistic valuation to base your decision on.

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Disclaimer

This publication is intended to help the reader understand the issues involved in selling a business. It is designed to provide information reflecting the experience of the editors and writers in helping sellers of businesses. It is prepared and presented with the understanding that the publishers, editors and writers are not engaged in rendering legal, accounting or other professional service. If legal accounting or other expert advice is sought, it should be acquired from competent professionals. The reader would be well advised to seek such professional assistance in the early stages of any consideration of the sale or purchase of a business.

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