Deciding whether to sell the family business can be as much or more of a difficult decision than the decision that was initially made to invest time, effort, sweat and tears, and net worth in the business.
Deciding whether to sell the family business can be as much or more of a difficult decision than the decision that was initially made to invest time, effort, sweat and tears, and net worth in the business. Even if the founding entrepreneurs can get past the formidable obstacles of dealing with other family members’ concerns, possible objections, emotions, and changing dreams, they still have to deal with their own separation anxieties.
Sometimes sellers approach the process of selling their business believing it’s only a matter of time and money. If so, they simply set their goal to maximize the liquid component of their net worth. Other times, the decision to sell may arise due to health concerns, no ready and able heirs, or a long-awaited and needed retirement. It’s perfectly normal for entrepreneurs to find themselves wavering back and forth in the keep-or-sell playing field. They should expect to have strong emotional ties to the business that consumed their waking hours for a great part of their life. It can be hard to even contemplate entering into a new chapter of their life’s book. They have had a long ride on the roller coaster and experienced its ups, downs, jerks, and sudden turns. Any human being would have mixed emotions. Digging deeply into the business transfer process can reduce emotions and help them solidify their thoughts and feelings.
Once the decision to sell the business has been made, it’s time to move forward in preparation for the sale. At the very beginning of the process, entrepreneurs shouldn’t expect much detailed help from business brokers or other professional advisors. The advisors will have many basic questions and the answers are probably still being formed in the entrepreneur’s head.
The professionals can best be used only after the entrepreneur has done some homework. Begin with the big question: “Do I have a saleable business?” Just because the business pays the bills doesn’t mean a new owner will have the same success. The answer to the question isn’t always “yes”, even though the face in the morning mirror indicates it is. It’s one thing to sell a business; it’s quite another to discount it and practically give it away. Bridging the gap is not always easy and it takes some active effort and forethought.
Several factors make a business attractive to buyers. A history of steady or growing profits is a primary factor. No one wants to buy a loser, perhaps unless they can acquire the loser at a fire sale price. To show their profitability in the best light, business owners will need to recast their financial information. Many family businesses can be overly aggressive in claiming all of their legal tax deductions. For entrepreneurs wishing to show the business in the best light, these expense areas may provide maneuvering room to decrease any aggressive expenses on a “proforma” financial statement. For example, if the yearly training was conducted overseas, the excess cost should be replaced with the cost of local training. Also, any generous family compensation costs should be replaced with fair market compensation levels in the local market. The purpose of the exercise is to show prospective purchasers the level of “normal” profits that they can hope to achieve. If the business has declining sales, there is not much to do other than to prepare a convincing explanation for the decline and be prepared to discuss strategic planning steps to generate more sales.
Long-term sales contracts can be a very attractive feature to discuss with the prospective buyer, especially if pricing is favorable and the contracts are transferable. If there is an opportunity to convert long-term customers from hand-shake contracts to written contracts, the buyer will feel more comfortable knowing that there will be a source of cash flow not dependent on the current owner’s relationships with the customers. This will give them the breathing room to build their new relationships.
If a lease is on a month-to-month basis, explore the possibility of negotiating a long-term lease. Also, make sure the lease is transferable to a new owner without price escalations. If the lease will not be renewable by a new owner, consider moving immediately. Buyers will not want to deal with a move as they are learning the business.
A dirty and unkempt workplace can be an initial turnoff to a buyer. Just as a homeowner may not notice excess clutter, a business owner may not notice the lack of basic maintenance since the clutter buildup occurred gradually. View the business from a buyer’s eyes. Any lack of routine maintenance will stand out to a newcomer. Also make sure equipment is in good repair and obsolete inventory is disposed of.
Visibly content and enthusiastic employees leave a lasting good first impression with a buyer. This is the time to “out counsel” poor performers and creates some cheerleaders. This is especially important at the supervisory level since the buyer may eventually wish to speak with management personnel. Sometimes having employment contracts and “stay bonuses” with key personnel will ease any fears of business disruption on the part of both the key employees and the buyer.
Planning to sell a business is no small task, and the result is never certain upfront. It can seem like a second job. Enlist the help of other family members and divide up the duties. They will be great cheerleaders and help make the business more saleable. If several family members are involved, be sure to appoint a spokesperson to avoid inconsistent answers to questions.
When asking the big question, “Do I have a saleable business?”, also ask the three fundamental questions that were certainly explored as the business was launched:
• What Do I Have? (A business potentially for sale.)
• What Do I Want? (A smooth sale and succession.)
• How Do I Get There? (Look at the business from a buyer’s point of view.)
Once some basic answers to these seemingly easy questions are formulated, it’s time to meet with the professional advisors.
This Is A Resource For You If…
Family Business Owners
Daniel J. Maloney CPA CBI CFP® CM&AA is the president of Certified Acquisition Advisors LLC, a business intermediary and consulting firm specializing in business planning and brokerage for sales, mergers & acquisitions.